Should You Take Out A Second Mortgage?

Second Mortgages

There will no doubt be a lot of people who, on hearing of the idea of a second mortgage, will ask rhetorically “With all the problems that a first mortgage seems to create, who on earth would wish to take out a second?". And while the question is understandable, the fact is that a number of people need to take out a second mortgage, while others who know that they can make the payments will take out a second mortgage to aid their cash flow for a large scale purchase for which their first mortgage and their deposit do not quite make up enough capital. The second mortgage should not be a first resort, but an option in the background when other options are frustrated.

A second mortgage is a common solution when a borrower has found the house of their dreams, and with the financing they have so far managed to secure they are unable to meet the asking price. Taking out a second mortgage – for a smaller amount than the first, naturally – may be the best option. The second mortgage is not, however, usually taken out so soon after the first, not least because the first mortgage in such a case is normally taken for the fullest amount the borrower can get. A second mortgage is frequently used in order to raise the money for repairs on an existing property or for some other necessary expense. They are usually given at a higher interest rate than the first mortgage, and begin to be paid off only once the first mortgage has been cleared in full.

For many of the above reasons, a second mortgage is something of a last resort in times of either dire need or acute want. If the property you are hoping to secure has immense resale potential and simply requires that last bit of financing to make it yours, then there is clear reason to look for the second mortgage. This should only be done, however, if you have exhausted other options, principally going to the lender who gave you the first mortgage and asking them if they can increase the amount of the loan. In doing this, you keep the loan at the original rate of interest and maintain the term of the loan. It may well mean paying off more per month, but there are points of negotiation.

Similar to the above, yet marginally different, is the refinancing of your mortgage. By extending the term of your first mortgage you can free up more cash for whatever you need, and maintain monthly payments at a reasonable level. You may also be able to use equity in your existing home. If you have owed the home for a significant period of time, especially if you have made improvements to it, then there may have been an increase in the value of the property, allowing you to place this equity into your first mortgage. It will increase the term of the loan and you will need to ensure that the interest rate is the same before proceeding. However, as compared to a second loan, it will usually be a better idea.