When to consider a second Mortgage

Purchasing a home involves the necessity of a mortgage in most cases, which is a considerable debt often serviced over a 25 to 30 year period. Having a mortgage means you can never really be safe in knowing that you own your own home, as if problems arise in repaying the mortgage you risk foreclosure, and the house is returned to its natural owner, the mortgage provider. Having a second mortgage running alongside the first one increases the risk of default, and costs you far more to service whilst your home is held as collateral.

Rather than concentrating on reducing overall debt and prepaying the first mortgage early, many borrowers are tempted to consider a second mortgage for a variety of reasons. Some take them at almost the first time as the primary mortgage to serve as a larger down payment and thus reduce their necessity of obtaining mortgage protection insurance.

They can even be used to cover the costs associated with obtaining the primary mortgage. However second mortgages come with a higher interest rate than primary mortgages as they are seen as more likely to go into default. They can be provided either by the primary mortgage lender or a different lender.

Others use second mortgages as a line of credit and use them for such things as vacations and furniture. Frankly this is financial folly as will end up costing far more than just saving up to pay for these things, and one could be jeopardizing ones home for the sake of a vacation. Others use them for debt consolidation as second mortgages are typically cheaper to service than credit card debt or loans, but balance transfer cards are a much better option for debt consolidation as do not require collateral.

They can be seen as useful if used for the type of home improvement such as adding an additional room, if the extension then represents an increase in the value of the property above the amount of the second mortgage. Some use them to pay education costs. A sensible use of second mortgages is to finance an emergency such as necessary medical costs. Some use them to secure a down payment on a second property.

If the value of the home exceeds the value of the primary mortgage held, then there is less risk involved to the borrower, but there is never a good reason to take out a second mortgage to simply obtain money to spend, as it is the equivalent of running up unnecessary debt. On top of the additional monthly repayments which will be required there will be associated costs of obtaining the second mortgage, and it will mean that there are two loans to be paid off before the home is completely your own.

The most prudent way of dealing with your finances is to try and reduce the term of the primary mortgage and thus save on thousands of dollars in wasted interest payments. Taking a second mortgage is doing the complete opposite of this and adds to your overall debt, meaning that you end up spending extra thousands of dollars in wasted interest payments. Unless it is used to fund an emergency a second mortgage is not a good deal to consider.