Thinking of getting a second mortgage, but you are not sure of the benefits and disadvantages of this move? It is imperative to know what a second mortgage is before you make a final decision to get one. Essentially, a second mortgage is a loan that you get against the equity or value of your home. Likewise, your home can gain value over time, which means that its equity increases. This allows you to borrow money using the property for other projects. In other words, a second mortgage is just another name for a loan that you get but this time it uses your home as collateral. The reason why this loan is called the second mortgage is that it is based on your first purchase loan that has to be repaid in case your home is foreclosed. As such, read on to learn some of the pros and cons of getting a second mortgage.
How to Secure A Second Mortgage?
There are two options that you can consider if you want to get a second mortgage namely direct or brokered. The direct route requires you to compare interest rates, conduct a home valuation, and consider all related costs which can be a daunting task. On the other hand, it is wise to work with recommended secured loan brokers since they can do the job on your behalf. You only need to provide your application to the chosen broker together with other pertinent documentation that can be used to support it. You should also furnish your broker with your income details that can be used in your affordability test.
Advantages of Second Mortgages
There are many advantages to getting a second mortgage. The following are some of the benefits that you can get from a second mortgage.
You Get Lower Interest Rates
A second mortgage usually comes with lower interest rates that you cannot get from any other type of loan. When you secure your debt with your home, this greatly reduces the risk to the lender, so the second mortgage is not that challenging to get. The lender offers lower interest rates on your second mortgage because it is secured unlike other types of unsecured loans that often come with high-interest rates. The interest rate for your second loan can also be fixed and this helps you to plan your payment over a certain period.
The Second Mortgage Gives You Access to Quick Money
The other advantage of getting a second mortgage is that it gives you access to quick money. You can borrow any amount of money you want because your loan is secured by your home. A second mortgage can come in the form of a lump sum that you can use for other projects and the good part is that you can pay the loan over time. Additionally, a second mortgage allows you to get access to a line of credit where the lenders can offer you a maximum limit to borrow. Just like how you use your credit card, you can borrow money several times until you reach the maximum cap. This means that you will never run out of money since you can get it whenever you need it.
Disadvantages of Second Mortgage
The main disadvantage of a second mortgage is that lenders will be happy to offer you equity cash when you want it. However, the problem comes when you decide to relocate, and the value of your house has depreciated, which means that you may end up owing the lender more than the value of your home. Additionally, when you fail to repay the loan, the lender can repossess your home through foreclosure. Therefore, it defies logic to get a second mortgage for consumption needs that can put your property at risk of repossession.
Additional Loan Costs
A second mortgage can be expensive since it includes numerous costs such as appraisals, credit checks as well as origination fees among others. On top of that, interest rates can suddenly spike which can affect your repayment capability. In short, no credit comes for free.
As you can see, a second mortgage has both advantages and disadvantages, so you should make a wise decision before you get this type of credit. Second mortgages are secured, and they give you lower interest rates. On top of that, the loan facility gives you access to quick money so you would not crack your head in a time of need. A second mortgage is flexible since you can set a repayment period that suits your needs and interests. All the same, you need to be careful when you get a second loan since every credit comes with related costs.