One of the ways that people can find some extra cash is to tap into their home’s value by getting a second mortgage. This type of mortgage is based on the amount of equity (or “ownership”) built up a home. A second mortgage allows the homeowner to receive money by securing the loan with their home’s equity.
Many people use second mortgages to consolidate debt, fund home improvements, cover the costs of college, or pay for a wedding. There are a number of possibilities and you can use the money however you wish ― even for a vacation! But keep in mind, like all financial tools, second mortgages come with drawbacks as well as benefits.
The Pros of Second Mortgages
There are a number of advantages associated with second mortgages. First of all, a second mortgage will give you access to lower cost financing than you would get with an unsecured personal loan or if you put the charges on your credit card. This lower interest rate will save you money in the long run (as compared to alternative forms of financing). Additionally, in many cases, the interest you pay on a second mortgage loan is tax-deductible.
Another advantage of second mortgages is that naturally appreciating home values can help your home’s equity replenish itself. As the years pass and you pay down the principal balance on your mortgage loan, the housing market will likely improve (as history has shown), and all that contributes to greater home equity.
The Cons of Second Mortgages
There are, of course, disadvantages to second mortgages. The largest concern (and potential pitfall) is the fact that you are securing the loan with your home. Therefore, if you run into financial trouble and cannot make your mortgage payments, you could lose your home ― a risk that some people aren’t willing to take.
Another issue to consider is that homes do not always appreciate in value. Like other markets, the real estate market goes through cycles and as a result, property sometimes loses value. If you have a second mortgage, you could end up owing more on your home than it is worth. Having an “upside-down” mortgage can be a huge problem, especially if you need to move but you don’t have the funds to cover what you owe.
Before you jump into a second mortgage, it’s important to think about your options and determine how much money it will take to meet your goal(s). It’s easy to get carried away using your home’s equity and borrow more than necessary. Instead of doing that, you should carefully consider the loan amount and only take out what you need.