There are many reasons you might want to consider getting a second mortgage on your home, and we will discuss some of them later on. In fact, at Addition Financial, we field a lot of inquiries from existing and potential members about second mortgage rates. They want to know everything they can about rates and options before they decide to take out a new loan with us.
Taking out a second mortgage is a big decision. You’ve got to be sure you have enough income to meet the monthly payments. A second mortgage is a loan taken out against the value of your home, so it goes hand in hand that not understanding all aspects of that loan could cost you. You’ll need to understand what your obligations are before you sign on the dotted line.
So, with that in mind, let’s talk about the common uses of a second mortgage. We’ll also talk about some options to consider, including interest rates and what you need to know when comparing second mortgage rates.
What are the Most Common Reasons for Taking Out a Second Mortgage?
Before we dive in to all the technical aspects of second mortgages, let’s talk about the driving force behind this big decision. The reasoning behind taking out a second mortgage can vary from household to household, but here are a few of the top reasons we encounter and the risks associated with each one:
1. Debt Consolidation
If you are stuck in a hole and need help climbing back out, a second mortgage may be the way to go. Taking out a second mortgage to help consolidate debt can be extremely beneficial as it can help lower your rates if the interest rate on the new loan is lower than the old loans or credit cards. Second mortgages also have fixed terms and payments so that you can get yourself back on track with manageable payments and a schedule.
So, a second mortgage for debt consolidation often results in lower monthly debt payments. However, the risk here is that you pay off your other loans with the second mortgage, but do not change your spending habits. Over time, new credit card debt could pile back on leaving you in more trouble with even higher payments. If you reach a point where you cannot make your payments on your second mortgage, you could lose your home.
2. Home Improvements
If your kitchen needs an update or your carpets are looking threadbare you may be in a renovation mood without enough money to complete the desired project. With a second mortgage you can take on those projects without using up all of your savings.
This is a smart option if what you are improving is adding value into your property. The basis of a second mortgage is to take out a loan against the equity in your home, so adding value back into your home is an easy way to ensure you are reinvesting the money wisely.
The risk here is that real estate values in the market may drop. The improvements you made might not be enough to preserve the value of your home, so you could end up owing more than the house is worth.
3. College or Technical School
Going to school can be incredibly expensive, and sometimes student loans are not enough to pay for the heap of textbooks and tuition. Taking out a second mortgage to improve your educational prospects can be very smart. With the benefit of a degree or a technical school certificate you can improve your earning bracket making your financial situation more sustainable. You could also finance a family member's education.
The risk here is that your new degree may not give you the same push into a field you were hoping for, or that you may take a few classes and decide it's not for you. If you are serious about hitting the books or learning to be a welder and are okay with the risks, this is a great way to go.
What to Look for When Comparing Second Mortgage Rates
The first thing you need to know is that interest rates for second mortgages are always higher than interest rates for first mortgages. That’s because there’s more risk associated with this type of loan. The lender for the second mortgage will be in second position with their lien, which means if a foreclosure happens, they’ll be paid only when the lender in first position has been repaid in full.
Here are some things you need to look at when you’re comparing second mortgage rates:
- The amount of the mortgage
- The interest rate
- Whether the interest rate is locked (meaning, can it change between the time it’s quoted to you and your closing)
- Whether the interest rate is fixed or adjustable
- How much the closing costs are
- How much your new monthly payment will be
That last point is very important. A second mortgage for consolidation purposes may give you a lower monthly debt load. But a second mortgage for education or improvements will increase your debt (since you're not using the proceeds to pay off loans), and therefore increase your overall monthly payments. Are you willing to pay more to live in the same home? The benefits of the second mortgage need to be weighed against the downside of a payment increase.
Locking Your Interest Rate
If you are going through with your decision to take out a second mortgage you have to make a few important choices. Regardless of the interest rate on your first mortgage, you need to decide whether or not to lock your interest rate.
Discuss this option with your lender. It takes time to process second mortgage documents and get the loan closed. In the days or weeks between the time you apply and the closing date, interest rates may go up. You could be in for a shock when you walk into your second mortgage closing and receive a different rate than you expected.
There are some risks associated with locking your rate. Once it’s locked, you won’t be able to benefit if interest rates should drop. You’ll have to weigh that risk against the peace of mind of knowing what your rate will be when you go to your closing. Once you decide on a rate the loan itself has fixed terms and payments to help you stay on schedule with payments.
There are a lot of things to keep in mind when evaluating second mortgage rates. The parameters we’ve provided here can help you make comparisons and decide on the best option for you and your family.
To learn about Addition Financial’s mortgage and refinancing options for homeowners, please click here now.
Posted on Jun 27, 2018
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