As you work on paying down your home’s mortgage, you might find yourself wondering why anyone would take out a second home loan. While borrowing against your home’s equity or taking out two loans to afford a property can seem like a bad idea, in some cases, a second mortgage can be beneficial. Before you take out two loans on the same property, take a minute to review the pros and cons.
Why a second mortgage?
There are typically two instances in which you would want two mortgages. The first circumstance occurs before you’ve even purchased the property. Sometimes called a piggyback loan, these mortgages lost popularity after the housing crisis — but they’ve been making a comeback, according to Bankrate. You might think about getting a piggyback mortgage when you don’t have enough money for a down payment. Piggyback loans also come in handy if you’re buying an expensive home and would otherwise have to get a jumbo mortgage.
You can also take out an additional mortgage after you’ve paid off a portion of your current loan. In that case, the mortgage is known as a home equity loan. It can be either a fixed sum or a revolving line of credit, similar to a credit card. The second loan can help you pay for a large purchase, such as improvements to the property or your child’s education.
Pro: Helps your cash flow
The major benefit of obtaining a second home loan is that it gives you access to cash. You can use the money to pay off other loans you might have or to cover the cost of an irregular expense. When taken out at the same time as the primary mortgage, the second loan acts as some or all of the down payment, which lets you avoid having to make private mortgage insurance payments.
Con: Higher interest rates
Rates on mortgages are still hovering near record lows. But when you borrow more money, lenders tend to view you as a greater risk. Usually, that means that second mortgages have higher interest rates than primary mortgages. Even so, the interest rate on a second mortgage can still be lower than the interest charged for other types of loans, such as credit card or personal loans.
Con: Increased debt burden
A potentially major disadvantage of borrowing against your home’s equity or getting two mortgages for one home is that you are increasing the amount of debt you have. Your home is the collateral for both loans, which can be a problem if you run into trouble and can’t make your payments. Even if you pay off your first mortgage, you can still lose your home if you have trouble paying the second loan.
A second mortgage can help you if you need cash, but it’s important to carefully weigh the risks against the benefits before you apply for one.
Image source: Flickr
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