April 1st, 2019 12:25 PM by Jackie A. Graves, President
A second mortgage is a loan taken out
against the value of your property, in addition to your primary mortgage. These
loans can offer great benefits, but they
certainly come attached with some large risks as well.
second mortgages are based on the amount of equity built up in
the home, they can allow homeowners to borrow a large sum of cash with the
flexibility to use it for any purpose. Credit cards and personal bank loans are
typically smaller and more limited in scope. Many people use second
home loans for things like debt consolidation, home improvement, avoiding private
mortgage insurance (PMI), paying for college tuition or investing in other
properties. Other loans usually just aren’t big enough to cover these types of
Another advantage of these home loans is that they are
considered safer by lenders than other types because they are secured by the
house. In other words, banks will actually get something back if you default on the loan. This means borrowers will generally score
much lower interest rates on second mortgages than on unsecured loans or credit cards.
And there are tax benefits of using second home loans
compared with other sources. The interest from a second
mortgage is tax deductible, unlike the interest from a credit
card balance, for instance.
though banks consider second mortgages “safer,” there are still some major
drawbacks involved with borrowing more money against a house. The most
significant of these is that second loans are risky. If the homeowner is unable
to repay the loan at some point, he risks losing his house to foreclosure and in turn ruining his credit. The risk of foreclosure
does not exist with other unsecured loans. This danger of a second loan should
make borrowers seriously consider whether or not they really need the large
Second loans require fees and closing costs, just like first mortgages. You may also be
required to pay points (one point is
equal to one percent of the loan value) which could make the loan less
And while second mortgage rates are better than credit card
rates, they are still higher than first mortgage loans. This is because the first mortgage takes
precedence over the second in terms of repayment in the case of default.
Second mortgages can be a great way to access lower cost
funding for certain major financial ventures, as long as borrowers do not
overreach by taking out more money than they can comfortably afford to repay.
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