Second Mortgage: The Path to Prosperity... or a Sinking Ship?
A second mortgage is any loan where the borrower uses a home he or she already owns as collateral. When you take out your initial mortgage loan, your home functions as collateral on the loan and a second mortgage is similar. However, the loan is secured by home equity that the borrower has built up through the purchase or paying down the original mortgage over time.
Loan vs. Revolving Credit
Now it comes down to choosing between a home equity line of credit or a home equity loan. A home equity loan is like any traditional loan – you get a lump sum immediately and pay it back at fixed payments monthly over the term. On the other hand, a line of credit functions more like a credit card. As a revolving account, it still relies on the value of your home and uses it as collateral. However, as you pay it off, you can also dip back into it, just as if you were using a credit card.
The Risks of Second Mortgages
While there are several valid scenarios where a second mortgage would make sense, it's important to fully understand the risks you could incur while applying for and getting one. The largest risk is that unforeseen circumstances that cause your income to slow down or stop could place your home in jeopardy. While most lenders will not bat an eye at offering a competitive applicant a second mortgage, you should ask yourself if it's truly necessary. Income should not be taken for granted and at a bare minimum, you should ensure you have a plan in case you do lose access to your income before applying.
Common Uses of Second Mortgages
Leveraging the equity in your home can be an excellent way to access funds at a low rate when you need to make home renovations, pay for school, to pay off high-interest debt or almost any other large expense. Some of the more popular uses include:
Renovations are among the most popular reasons homeowners use the equity in their home. Not only is the home more enjoyable, but you are adding tangible value when it comes time to sell.
Who wouldn’t want to pay off high-interest debt at a much lower rate? If you are making payments anyway, using equity in your home is a great way to make those same payments and pay off debt faster. Just make sure that you do not start charging up your cards again.
If you can get a lower rate tapping into the value of your home than you would get with student loan companies, it’s a great way to pay for college.
While a second mortgage can serve as a lifeline for some, it has undeniable risks, especially for those more prone to impulsive spending or who work in volatile industries. You should also look at home value trends in your area first as there's always the danger of turning your mortgage into an "underwater mortgage," one where you then still owe more than the house is worth.
If you are going to borrow money for a large expense and have equity in your home, leveraging that equity will get you a better rate and more favorable terms. View Truliant's home equity options or give us a call today.