A second mortgage is a loan that is taken out using your home as security. This type of mortgaging comes after the first mortgage or 1st mortgage, which is usually taken out by homeowners early on in life. Second mortgages take two forms: adjustable-rate mortgages and home equity loans. The two can be used for similar purposes, but the latter has a fixed interest rate.
In What Way are 2nd Mortgages Adjustable?
In an adjustable mortgage, your monthly payment can fluctuate from month to month depending on the current market rates of interest. This means that you could end up paying more or less than originally planned on if interest rates rise or fall. As rates drop, you can end up paying less than expected; but if they rise, you pay more.
What are the Good Points of 2nd Mortgages?
The only advantage to adjustable-rate mortgages is that monthly payments may be lower when interest rates are low. But this isn’t an issue because fixed-rate loans tend to have lower interest rates overall.
2nd mortgages are also often called home equity loans which are both types of second mortgages
What are the Bad Points of 2nd Mortgages?
Potential problems with adjustable-rate mortgages include rising monthly payments and negative amortization. A rise in the current market rates of interest will cause you to pay more than originally planned per month. And, with a negative amortization loan, your outstanding balance will likely grow over time instead of shrinking. In the event that you have to sell your property, you’ll have to pay thousands in closing fees and deficiencies.
What are the Advantages of Home Equity Loans?
Home equity loans generally have fixed interest rates, so your monthly payments remain stable. You can also borrow a set amount, with specific terms and conditions attached to the loan, which you cannot do with adjustable-rate mortgages. And this type of 2nd mortgage is worked into your primary 1st mortgage; it doesn’t typically involve another lender or extra fees.
What are Common Uses for 2nd Mortgages?
Some homeowners use 2nd mortgages to consolidate debts, pay for home renovations or other large expenses, or fund their kids’ college educations. Others take out this type of loan in order to repay other debts like credit card bills and auto loans.
What are the Pitfalls of 2nd Mortgages?
With either adjustable rate or home equity second mortgages, you can end up paying more than expected if interest rates rise. For this reason, it’s best to avoid 2nd mortgages unless you are absolutely certain that you can afford your monthly payments.
The bottom line is that a second mortgage can give you some temporary financial relief, but it won’t solve your real problem. Your priority should be to pay off your debts as soon as possible and avoid interest payments at all costs.