Understanding Second Mortgages And What They Do

Second Mortgages

Being a homeowner is an incredibly satisfying thing, with a lot of potential for making something special. However, it is something which comes with a great deal of stress, particularly in relationship to the question of financing. Taking a mortgage out is standard practice for a lot of homeowners as a good way to up the affordability of the venture as a whole, since it can be, obviously, very, very expensive to own a home.

Less popular than a basic mortgage, but with its own set of potential advantages for homeowners, is the second mortgage. A second mortgage can act as a convenient way of gaining some extra funds. Let’s take a look at the details and why you might want to consider one for yourself.

What Is A Second Mortgage?

A second mortgage is officially known as a ‘Home Equity Line Of Credit’ or HELOC. It refers to a type of loan that you borrow against the value of your home as an asset. You are essentially finding a way to use the asset for things you want to without selling it. It’s known as a second mortgage because the loan you took to make the initial purchase of your property is your primary mortgage. You get a one-off payment with a second mortgage which you are free to use however you want and the payment system is similar to a primary loan, in that you pay a set amount each month for the term of the loan. It’s important to remember with a second mortgage that the same risks are present: just like your initial mortgage, if you aren’t making your payments then you can go into foreclosure and lose your property. You have to be really vigilant about this, for obvious reasons, and you might want to consult a professional before making the decision, to see whether it is financially advisable. The amount you can secure will depend on a lot of factors, including the value of your property and how much the primary mortgage is for. But, in all likelihood, there is a good amount of money there to be made which could help you with whatever you need the money for.

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The Pros Of A Second Mortgage

The first and most striking advantage of a second mortgage is the fact that you may be able to get easy access to a large amount of money instantly. It’s very difficult to get substantial loans usually, for the obvious reason that the lender is incurring far more risk in making the loan than on a smaller loan. With a second mortgage, depending on the equity you have, you could be looking at hundreds of thousands of dollars in one bulk payment, which can be really helpful. Secondly, the interest rate on the loan is often fixed, which is incredibly helpful for the repayment process which can otherwise be very stressful. The interest rates are also often lower that other loan options because of the second mortgage being on a fixed asset (your home), which is another advantage. There are also some options for tax deductibility which are worth exploring, though they require specific scenarios.

The Cons Of A Second Mortgage

One of the primary cons is that it’s a loan. Obviously, there are times when you simply need a loan for whatever reason, but it’s never ideal really. There’s always a lot to be considered in terms of incurring the downsides for all the benefits. One obvious disadvantage to a secondary mortgage is that it means you now have to quite substantial payments due in a month, the first being you primary mortgage. This is a pain and can cause problems if you aren’t vigilant about your money management. Another issue is the closing costs, which is a consideration that has to be taken. Understanding all of the costs, including those that are hidden, is a vital step to making the decision to take a second mortgage and could actually work to change your mind about things.

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Typical Usage

The purpose of a second mortgage is entirely up to the homeowner and isn’t usually of all that much importance to those orchestrating the loan. The exception to this is when you are using a secondary mortgage in a way that relates to the house itself. For example if you take out a large amount of money in a second mortgage and use it to build an extra floor to your house or some other development which actually increases the value of the house itself then that is important to note as you go ahead with the mortgage. One big advantage that this sort of usage has is that it offers some potential for tax deductibility. Other usages are for anytime that you need a blk amount of money quickly, which is rare but possible. For example, it may be useful for paying college fees or in a situation where ill health is a factor. The volume of money you can get is what makes it really appealing.

How To Get A Second Mortgage

There are a few things that you ought to be looking to do to give yourself the best chance of getting a second mortgage. Firstly, the more equity you have with your asset, the higher the likelihood you’ll receive a second mortgage. Secondly, you need to have a steady income, with enough going beyond essential costs to reassure your mortgage lender that you can make your payments. Thirdly, you need the best credit score you can get. A bad credit score gives you no chance of getting a secondary loan.

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There are times in life when you simply need to incur the elevated stress of taking a loan for the sake of the money you will receive. In the case of the second mortgage, it is, on balance, one of the safer more user-friendly loans that you can hope to get. See if it’s right for you and plan carefully.

Author Bio :

Beatrice, a professional copywriter for Thesis Help, is focused on lifestyle and child-rearing articles. She enjoys sharing her personal experiences as a mother and helping other parents raise their young kids.