A second mortgage (sometimes referred to as a home equity line of credit or HELOC) can be a useful tool for getting the financing you need for things such as home renovations, medical bills, starting a business or paying off higher interest consumer debt. With a second mortgage, you can access the equity in your home and not have to break your existing mortgage.
The question is, does it make sense for YOU to get a second mortgage? There are certainly benefits to be had, but this type of loan is not right for everyone. Before deciding whether or not to apply for a second mortgage, here are a few things that you’ll want to consider.
A second mortgage provides emergency cash
Perhaps the biggest appeal of getting a second mortgage is the fact that it can provide you with a large lump sum of cash which you can spend in any way you like. Usually the terms on second mortgages are shorter than on primary mortgages, so you should ideally consider this type of loan only for a short term need.
It is important to remember that second mortgages come with risks. If a person who has a second mortgage becomes unable to make the payments, they risk bankruptcy or foreclosure. Therefore, before applying for a second mortgage you should consider whether you truly need the loan.
It may be easier to get a second mortgage through a private lender
Sometimes when you are most in need of a loan, traditional lenders will consider you to be too risky to work with. It is often much easier to get a second mortgage through a private lender – especially if you are working with a professional mortgage advisor.
Remember though, that because private lenders tend to take more risk, they will also usually charge a higher interest rate.
Is refinancing a better strategy?
One alternative to getting a second mortgage is refinancing. Whether or not you should choose refinancing over a second mortgage will basically come down to cost.
Say for example, that you are only about a year into your current mortgage. If this is the case, the penalty for breaking your mortgage may be very high. In this scenario, you will probably be better off getting a second mortgage.
On the other hand, if your current mortgage is nearly up for renewal or if the interest rates you are paying are high, then you may be better off to break your current mortgage, pay the penalty and refinance.
A mortgage broker can help you determine whether it makes more sense financially to get a second mortgage or to refinance.
You need to have an exit strategy!
People often dream of the day when their mortgage will finally be paid off. That day will inevitably be delayed if you get a second mortgage. It is a good idea therefore, to sit down with your mortgage advisor and devise a plan that will help you pay off that second mortgage as quickly as you can.
If you are interested in a second mortgage or any other mortgage product, give me a call today and let me help!