A second mortgage is the loan you take out on your home when you already have a mortgage. There are a number of reasons why a second mortgage might make sense for you.
If you have a project where you know exactly how much money you’ll need, a second mortgage can be a better alternative to a home equity line of credit. The difference is that with a second mortgage you receive a lump sum payment. With a home equity line of credit you borrow as you need the money up to some pre-determined amount.
The interest rates on second mortgages are generally lower than on a home equity line of credit but they are higher than the rates on primary mortgages. Before you take out a second mortgage, it makes sense to look at refinancing the entire loan amount. Where this doesn’t make sense is if you have a hefty pre-payment penalty on the first mortgage or if the interest rate is very low.
Like first mortgages, the interest on a second mortgage is tax deducible. This might be an advantage in using a second mortgage to pay off high rate, non-deductible credit card debt.
Before you shop for a loan an important consideration is how long you intend to stay in your home. If you know that you’ll be moving within a few years, you can save some money with a balloon or adjustable interest rate loan. Rates for these types of loans tend to be lower because you are assuming some risk that interest rates will rise. Most of these types of loans have caps on the amount the rate can rise in a given year and an absolute cap on the highest rate possible. If you know that your loan will be short-term you can take advantage of these lower rates.
However, if you know that you want to stay in your current residence for over 15 years, it makes sense to look at fixed rate loans. Interest rates are notoriously difficult to predict but because rates have been at historically lows, it makes sense that in the long term they will go higher. Paying a slightly higher rate now might save you money in the long run.
Second mortgages can be either short term with repayment in as little as a year or they can be stretched out for as long as 20 years.
When you shop around for your refinance loan be sure to count all the costs before you decide on a lender. Some additional costs such as attorney fees, filing fees, title search, taxes and insurance can add to overall cost of the loan.
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