Any loan you obtain using your home as collateral is called a mortgage. The loan you acquire in purchasing the house is the first mortgage. Subsequently, if you own at least 20% equity of the property and have a good credit score you are cleared to get a second mortgage.
Despite the popularity of the option of getting a second mortgage, questions persist about whether it is a good or bad idea. Following careful study and firsthand experience concerning second mortgage, this article provides you a wide range of perspectives concerning the suitability of exploring this option.
In the following paragraphs, you will learn when it is okay to get a second mortgage and when it is best to seek alternatives. Few alternatives are also highlighted, but are by no means exhaustive.
Why a second mortgage?
The most important question to answer when considering the idea of getting a second mortgage is to ask yourself why you need it. If you can’t answer the question by yourself, maybe it is time you talk to an expert mortgage advisor? Questions like what’s the process of getting a mortgage and will having 2 of them good for you financially? The mortgage advisor should be able to help you answer this question after asking you a couple of questions about your needs and financial situation. People have different reasons for seeking a second mortgage including: children’s education, travels and even paying off another debt.
Wealth improvement versus lifestyle upgrade
When you are looking to put money in money making opportunities like income properties, a second mortgage could be a very good proposition. The same goes for the pursuit of advanced degrees with promise of higher income as long as the loan’s interest rate is low.
On the other hand, getting a second mortgage for lifestyle upgrade requires serious thought. It is often a bad idea and does not necessarily improve your bottom line.
Paying off credit card debt
Overwhelming consumer debt is one of the major reasons people seek out a second mortgage. Using a second mortgage to settle credit card debt can be a very good idea because of the lower interest rate. However, if the attitudes that brought about the debt in the first place are not put in check, getting a second mortgage could set you up for even worse situation. The behavior will lead you into another debt since you have available credit in addition to new mortgage payment.
The low interest that comes with a second mortgage is quite enticing, but you must remind yourself that your home is what you are putting on the line. Can you sustain the mortgage payment in case of financial issues? Credit card debt isn’t good, but defaulting on mortgage payment is tantamount to losing your home. The worst that could happen with credit card debt is incessant calls from your lenders as well as the significant effects it has on your credit score but you don’t lose anything physical. It might even be the perfect opportunity to work on the behavior that landed you in serious credit card debt.
Private mortgage insurance (PMI)
Homeowners who own less than 20% of their property have to pay PMI every month. Getting a second mortgage to set off this monthly payment by acquiring a greater percentage of the property will be a good idea if the cost of the second mortgage is below the cost of the PMI.
What are the available alternatives to getting a second mortgage?
If you have any doubt about getting a second mortgage, don’t take it. Reselling your home for a more affordable housing may be the best alternative if you have a large amount of home equity.
Focus on increasing your income rather than piling up debt. This will save you from the stress of debt repayments. If we focus on more income, it is achievable. More work hours, exploiting other skills and diversifying are good options to increase income flow. Debt of any kind is no man’s friend; you shouldn’t indulge in it except absolutely necessary.
Getting a second mortgage can be a good or bad idea depending on the reasons you are getting it. If it is for wealth increase, you can embrace it, especially if the interest rate is low and the business you are investing in has high security. You should not take a second mortgage or even any kind of loan at all for highly risky and volatile markets because this isn’t the time to play luck.
If the reason you want a second mortgage is for lifestyle upgrade, it is a very bad idea. The bottom line you must never forget is that your home, where you and your family live, is what you are putting on the line when getting a second mortgage. If for any reason, you cannot meet up with the mortgage payment then you stand the chance of losing your home. Yes, you lose your home if you default.