A second mortgage translates to a second loan against your home. It’s similar to a first mortgage in that you get a one-time payment and then pay a certain amount of the loan off per month. You can only receive a second mortgage if your first one is paid off. The interest rate is typically higher on a second mortgage and your home will be used as security for a second mortgage.
There are many different reasons why you might want to consider taking out a second mortgage. If your credit rating has decreased, you’re self-employed, or you want to avoid Private Mortgage Insurance, then you’ll want to consider a second mortgage. Taking out a second mortgage isn’t for everyone. We’ll touch upon some of the main reasons why you should or shouldn’t take out a second mortgage below.
Lower Credit Rating
If your credit rating has decreased since your first mortgage, then you might want to consider a second mortgage. You’ll only pay an increased interest rate on your second mortgage instead of on your entire mortgage. This will allow you to pay less and save money in the long run.
You’re Self Employed
If you’re self-employed, it might make it more difficult to get a personal loan. If you definitely need that loan, then consider taking out a second mortgage.
Avoid Paying Private Mortgage Insurance
If you don’t have a large down payment on your home, then you might want to take out a second mortgage to avoid paying PMI (Private Mortgage Insurance). If you didn’t make a 20 percent down payment on your home, then you’d have to purchase Private Mortgage Insurance. This protects the bank if you’re unable to make your payments. You’ll be able to avoid doing this by taking out a second mortgage.
Debt Payment Plan
Having a second mortgage with higher interest rates means you’re going to want to pay it off faster than your first mortgage. Set up a debt payment plan to help you pay the second mortgage off so you can quickly clear your debt.
Avoid taking out a second mortgage if you want to use it to pay off credit card debt. If you’ve gone into credit card debt already, this might mean that you haven’t yet figured out a tactful way of clearing debt. If you take out a second mortgage, you might go deeper into debt and might lose your home if you cannot make payments.
You should also avoid taking out a second mortgage if you want to consolidate debts. You might end up paying more interest in the long run.
Early Repayment Charge
You’ll want to consider a second mortgage if your mortgage has a high early repayment charge. Taking out a second mortgage might be cheaper than remortgaging.
Seek Counselor Advice
You should get professional advice from a housing counselor before taking out a second mortgage. They’ll be able to give you the best tips and point you in the right direction if you’re serious about the second mortgage. That way, you won’t end up paying more in the long run.
If you’re asking yourself if you should take out a second mortgage, then you need to consider all of the pros and cons of doing so. If you’re self-employed, have a lower credit rating, or want to avoid paying PMI, then you should definitely consider taking out a second mortgage.