When you’re a homeowner, there’s a tremendous amount you constantly want to get to, but you might find you either have no time or no money with which to do so. Projects loom and present themselves to you fully-formed and only the financing remains, but you just can’t quite get there. That’s where second mortgages come in. The advantages of a second mortgage loan are manifold, but you might find this particular funding method isn’t for you. Here are the pros and cons of getting yourself a second mortgage.
PRO: Quick cash injection
If you’re planning a DIY project, a holiday, or some other endeavour that requires a lot of money fairly quickly, then you can’t go far wrong with a second mortgage. These loans are additional home loans secured against your property, so as soon as you can prove what your equity is, you can pretty much have the money without a huge delay. This means if you’re aiming to complete your project quickly, you won’t need to wait around for lengthy approval processes.
CON: There can be fees attached
Depending on where you go for your second mortgage, you might encounter fees as part of the application process. You’ll need to have your home valued and your equity appraised, and this can be costly. There are also application costs, closing costs, and various other fees which can be associated with taking out a second mortgage. Certain firms might not impose these fees, or might only impose some of them, but it’s pretty much guaranteed that you’re going to have to pay at least something.
PRO: Good interest rates
Since you’ve already got a property, and since you’re securing another loan against that property, many loan companies will give you very favourable interest rates indeed. If you compare second mortgages to credit cards and even some mainstream bank loans, you’ll find the second mortgage interest rates compare extremely well to those alternatives. As such, if you need to take out a loan, you’re probably better off limiting costs by applying for a second mortgage.
CON: It’s secured against your property
This is only a con if you’re concerned about not being able to repay the second mortgage, in which case you should perhaps think twice about applying. A second mortgage, just like your first one, will be secured against your property. This means that if you can’t pay your loan back, your lender will be well within their rights to foreclose on the property and you could lose your home. This is, we must stress, only an extreme circumstance and is unlikely to happen to the vast majority of customers.
PRO: Could improve credit rating
Sometimes, second mortgages (and loans in general) can actually boost your credit rating. Some credit companies like to see that you’re capable of paying back loans in a timely manner; a second mortgage will show them that you can juggle multiple loans and you’ve got the finances to repay them quickly and efficiently. If you’re struggling with a poor credit rating but you’re lucky enough to be in possession of a house then a second mortgage can be a good option for you.
CON: You need to be careful with spending
When you take out a second mortgage, you might be tempted to let your mind drift to things you don’t technically need but that you’ve always wanted. This would definitely be a mistake. A second mortgage should only be used for the thing you originally allocated it to, because if you simply spend frivolously without considering the original purpose, you’ll only accrue more debt. Make sure you’re being sensible with your second mortgage.
PRO: You’ll be able to pay for things you couldn’t usually afford
If you’ve got a large family, or if you find yourself in the middle of a series of unexpected and financially detrimental circumstances, then a second mortgage can really help to lift you out of those problems. Whether you’re struggling a little with a relative’s illness or a sudden change of employment status or whether you simply want to pay for a loved one’s wedding or birthday celebration, a second mortgage can help you do this.
CON: You shouldn’t apply if you’re not solvent
We can’t stress this enough: don’t apply for a second mortgage loan if you’re not absolutely sure you can’t pay it back. Applying for a loan in the middle of another loan you’re already struggling with will simply increase your debt and your stress to go with it. Before you apply for your second mortgage, make sure you know it’s what you want and that you can bear the weight of it. Many lenders will be understanding if you can’t make regular repayments or don’t have great credit, but not all will.
PRO: Many second mortgage loans offer adjustable rates
If the interest rate happens to fall while you’re paying for a second mortgage, there are many lenders who will offer you variable rates, which means you’ll pay the current rate instead of the rate when you borrowed. Of course, this is entirely dependent on the lender; you might not go with one that offers this service. Still, the fact remains that second mortgages can be great for adjustable interest rates, so if you’re looking for a flexible loan you could do a lot worse.
CON: Sometimes sales tactics can be suspect
As with anything in life, second mortgage salespeople want to sell you something. The less scrupulous salesperson will probably try to obfuscate terms so that you’re not quite sure exactly what you’re getting into. They might also offer you a series of useless extras and attempt to sell them to you as though they’re of critical importance. You need to be on the lookout for exactly what you need and what you don’t need when it comes to applying for second mortgages.