Similar to a regular mortgage, a second mortgage is a loan taken out using your home as collateral. Whether taken as a lump sum, or as a line of credit (the latter of which is commonly referred to as a HELOC, or Home Equity Line of Credit), a second mortgage, if leveraged to your advantage, can empower you to boost your wealth in the long-term.
But, as is the case with any major financial decision, there’s a lot to consider. It’s always recommended to consult with a trusted real estate or lending expert to determine what’s best for your individual needs, but to shed some light on the basics, here are some quick pros and cons that come along with a second mortgage.
THE PROS
Money, money, money.
If you’re hoping to secure a loan in a large amount, applying for a second mortgage makes sense for a number of reasons. You’ll have access to much more cash by taking out a second mortgage than by other means.
Favorable interest rates.
Similarly, interest rates that come along with a second mortgage are likely going to be far more palatable than the ones you’d experience taking other types of debt.
Opportunity.
If you’re considering a second mortgage in order to finance some significant improvements to your home, you’re not alone—this is common practice, and in many cases, it’s highly advantageous. Given that the improvements you have in mind will ultimately drive up the value and equity of your home, they’re strategic in building your long-term wealth.
To ensure that the math not only checks out, but that today’s investments may one day yield the best possible dividends, it’s advisable to work with a trusted real estate professional in weighing your options.
THE CONS
There are fees.
Sure, a second mortgage means gaining access to a large amount of money at a favorable interest rate—but the access isn’t free. In addition to interest rates, plan to pay for appraisals as well as application fees and closing costs. If you’re opting for a HELOC as opposed to a lump sum of cash, you’ll skip these fees, but will most likely pay higher interest rates.
Ultimately, it’s a risk.
The reason you’re able to tap into your home’s equity and borrow money against it at such favorable interest rates is simple: the risk in on you, not the bank. If you’re unable to hold up your end of the deal by making agreed-upon payments, your lender can foreclose, and you can lose your home.
Therefore, it’s absolutely essential to understand what you can comfortably afford to pay every month, and very much recommended that you consult with an experienced professional before making any decisions. Reach out and we’ll connect you with a First Team agent in your neighborhood.
