What Is a Second Mortgage?
A loan that allows you borrow against the worth of your home is what you called a second mortgage. Your home as an asset can increase value over time. Second mortgages are a way to utilize that asset for other project and goal by not selling it.
Second Mortgage Barrie tap into your home’s equity which is the value of your home in the market relatively to any loan balances. The equity can decrease or increase, but ideally, it only raises over time.
Equity can change in many ways:
When doing a monthly payment for your loan, your loan balance is reduced that is why your equity increases.
If your home increases its value because of the home improvements you did and because of a strong real estate market, it increases your equity.
You lose equity only if your home loses value or you have borrowed against your home.
Second mortgages could come in numerous different forms.
Lump sum: It is a standard second mortgage and a one-time loan that provide you a lump sum of money that you can use on whatever you may want. With this type of loan, you could repay the loan slowly over time through fixed monthly payments. In every payment you make, you are paying a part of your loan balance and part of the interest.
A line of credit: with this type of loan, you are not required to take any money, but you have the option if you want to. Your lender just set the maximum amount you can borrow and you can borrow multiple times until you will reach the limit and you can pay and borrow over and over.
Rate choices: depending on the type of loan you are using; your loan comes with a fixed interest that helps you plan for your payment for years to come.
Advantages of Second Mortgages
Loan amount: You are allowed to borrow large amounts on the second mortgage because the loan you have is being secured by your home which gives you access to more you can possibly get without having your home as collateral.
Interest rates: Second mortgages have lower interest rates compared to other types of debt. By securing your loan with your home reduce the risk for the lender and the interest rates are usually in single digit.
Tax benefits: in some cases, you will get a deduction for the interest paid on the second mortgage. Ask your tax preparer before starting to take deductions because there are number of technicalities involve
Disadvantages of Second Mortgages
Risk of foreclosure: The risk of putting your home on the line is that if you don’t make payments anymore, your lender will be able to foreclose your home.
Cost: you will need to pay several costs for things such as credit checks, origination fees, appraisals and more. Even if they have promised that there is no closing cost, you are still paying. Closing cost can add up thousands of dollars but you won’t see the cost transparency.
Interest costs: you are paying interest anytime you borrow. Its rates are typically lower than the rate of credit card interest and slightly higher than your first loan rate.