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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Second Mortgage
The second mortgage is a relatively self-explanatory term. However, it the one that is often open to misinterpretation and one that you definitely want to hear as you are planning to apply for a home equity loan.
A lot of people think that the mortgage is a loan to purchase your home by definition it is actually a bit broader than that.
In this post, we will learn what is a second mortgage and its pros and cons.
What is a Second Mortgage?
A second mortgage is a loan acquired by the borrower on top of the first mortgage based on his equity in his home.
In this, you can borrow up to a specific limit depending on the value of your house and your share in the home. Usually, people approach the same lender who has their first mortgage to get a second mortgage.
However, they have a choice where they can go to a different lender to get a second mortgage.
Pros of Second Mortgage
1 – While taking a second mortgage lenders to allow you to borrow up to 80% of your home value.
If you have a first lien or a mortgage on your home, you can get a loan up to 80% which also includes your first mortgage.
The example is given below
$100,000(HomeValue) – $30,000(1st Mortgage) = $70,000(Home Equity).
In the above example, you would have $70,000. However, you would be able to get a second mortgage only up to $50,000 as the total of 1st and 2nd mortgage cannot exceed above $80,000.
2 – The second advantage of getting a second mortgage is that it is secured against your property. That means 2nd mortgage is a secured loan and they are less riskier for the lenders compared to any unsecured loans.
Second mortgage rates are always lower compared to any other unsecured loan.
Since the second mortgage rates are lower, you can save a lot of money compared to getting an unsecured loan. 2nd mortgage rates are fixed for the tenure of the loan.
3 – The third advantage of the second mortgage is that if you are using the second mortgage for home improvements, you can get tax benefits as well.
You can get an opinion from your trusted legal advisor as to how you can get the tax benefits.
Cons of Second Mortgage
1 – before taking a second mortgage beware of the pitfalls so that you can reduce your risk and use the second mortgage more wisely.
The first disadvantage of the second mortgage is that it is not cost-effective.
Compared to any credit cards or personal loans, the second mortgage has a higher cost as it includes appraisals, origination, credit checks, and more.
Some of these might not be upfront costs, however, they might be added to your loan amount.
2 – The second disadvantage of getting a 2nd mortgage is that it comes with a risk of foreclosure.
This is one of the significant things that you need to know because, at any point in time if you stop making your monthly payments, the lender has the right to foreclose on your property.
3 – Though the second mortgage interest rates are lower than any of the secured loans, they are still higher than the 1st mortgage.
If you are looking to get a second mortgage, we would suggest comparing the second mortgage rates with a cash-out refinance or line of credit before you make an informed decision.
Conclusion
There are many reasons why people opt for second mortgages, however, we would always suggest checking all possible options before getting a second mortgage.
You may want to select an option that at times may make more sense and looks less risky.
