Advantages and a Few Disadvantages of a Second Mortgage

Advantages and a Few Disadvantages of a Second Mortgage

A second mortgage or subordinate mortgage allows you to put your home equity to good use. Second mortgages can be used to pay towards home or property renovations, college fees or debt consolidation. Though second mortgages offer homeowners quite a few advantages, there are also a few disadvantages you should know about.

Advantages of second mortgages

You should consider a second mortgage for a meaningful expense and only if its offers tangible benefits. Though there are a lot of other refinancing options in the fiscal market, here are some reasons why you should go for this kind of mortgage.

Good amount of cash Second mortgages are ideal if you need a substantial amount of money to meet expenses. As this loan takes your home equity into account and is a second lien against your property, you can access a large amount of money.

Payment options - A second mortgage, which is a second loan on your home or property, can have a loan term as long as 30 years. The amount borrowed can be paid in convenient monthly installments, as you would pay for your first mortgage.

Clearing off debts Second mortgages are often the most preferred options for clearing off your existing debts like credit card debt or other personal debts with a high rate of interest. Using the process of debt consolidation, you can consolidate all your high interest debts into a single low interest debt, making the repayment process easier and hassle-free. Such a mortgage is also the best way to convert your unsecured debt into a secured debt.

Insurance and tax benefits Homeowners take out second mortgages to avoid paying Private Mortgage Insurance (PMI) that has to be paid when your loan-to-value percentage is more than 80%. Also, unlike the interest on other refinancing options, the interest paid on second mortgages is tax deductible, making it the most practical solution to free yourself from high interest debts.

Can be used to meet important expenses One of the main reasons people opt for second mortgages is because of their versatility and ability to allow borrowers to meet financial needs. There is no hard and fast rule on the use of money obtained from second mortgages. Individuals usually take second mortgages for purposes like purchasing a car or property, to pay off their medical or college bills, or to remodel or upgrade their house to increase its value.

Disadvantages

Though the advantages take the upper hand, there are also a few disadvantages you should consider before choosing second mortgages.

This mortgage puts your most valuable asset - your home - at risk. If you fail to repay the loan, your lender can lay claim on your home.

Compared to the first mortgage, the rate of interest, mortgage fees and prepayment penalties for this mortgage are considerably higher.

Choose a second mortgage after researching the rates of interest offered by different lenders and the monthly payments you can afford to make. You can approach your first mortgage lender for your subsequent mortgage and check if your lender can waiver some fees/charges.

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