Is a Second Mortgage a Good Idea?
In order to determine the pros and cons of a second mortgage, let’s first explain what it is. A second mortgage on a home is basically the process of taking out a “second” loan. It does not take precedent over the original mortgage, which would have to be paid first.
Under what conditions would a homeowner take out a second mortgage? There are a variety of reasons, including healthcare costs, college, home improvements, consolidating debt, or perhaps to create an equity line of credit.
In today’s market, however, it is going to be quite difficult to obtain a second mortgage. The reason for this is that the value of homes is in decline. On the other hand, in cases where a home has a great deal of equity, there may be the possibility that a second mortgage can be obtained.
Generally, however, a second mortgage may be the only way to pay outstanding debts and/or increase the value of the home by making significant improvements.
Unfortunately, there are disadvantages in taking out a second mortgage. What if you cannot pay back the loan? The consequence is foreclosure, considering that you have the first mortgage pending as well.
Secondly, there are higher rates incurred with second mortgages. In fact, banks view a second mortgage as a higher risk because the homeowner is still paying off the first mortgage. In today’s economy, the chances of defaulting on a second mortgage are much greater.
In addition, there are many fees associated with a second mortgage. This, combined with the initial mortgage, can put a family into dire financial straits if neither mortgage payment can be met.
Given the difficult times we are living in, it is not a good idea to take out a second mortgage on your home unless you can afford to do so. But, even then, the market value of your home can decrease even further; a health crisis may occur, you may be laid off or have other debts that you can no longer pay.
There is no way of knowing how long this current economic crisis is going to last. Are you willing to take the risk of losing your home by taking out a second mortgage? If you are thinking of a second mortgage to consolidate debt, another prudent course of action would be to speak to a financial counselor who can guide you into finding an alternative way to pay down your existing debt.
Think twice about a second mortgage on your home. There are many disadvantages in pursuing this course at this time.