Financial advice pros and cons of a second mortgage

Posted: 02/09/2007--25/11/2008 || Rate this Article: 3 || Views|| Sign In || Register ||Hello Guest

With the recent declines in interest rates, many lenders and mortgage companies have been bombarding homeowners with offers of refinancing and home equity loans. Home equity loans, also known as second mortgages, do offer many pros as well as cons. As a homeowner, one has to weigh both before making such a decision.

Some of the more common pros to obtaining a second mortgage would be the additional cash at hand one can used for a number of reasons. For example, if you have several high interest credit cards, the money can be used to pay off these cards, which will help you save money in interest payments. Its much better paying 4% C 6% in a second mortgage than 22% - 28% to a credit card company. Many homeowners with children on their way to college will also tap into the equity of their homes to help pay for some or all of the tuition costs. Then there are those who will obtain a second mortgage for home improvements, such as remodeling a kitchen and/or bath, replacing an old roof, installing new energy efficient windows, etc. Yet others will use the money for more leisure reasons like a much needed vacation, or purchasing a new car.

Although these are very good reasons, one must also consider the cons of a second mortgage. For example, if you have plans of selling your home in the near future, obtaining a second mortgage would not be a very wise move. When it comes time to close on the sale of your home, the proceeds of the sale must be used to pay off the existing mortgage AND the second mortgage. This can substantially reduce your net proceeds. Keep in mind that not only do these mortgages have to be paid off, but there are also other closing costs as well such as the Realtors commission. You should know that the commission is based on the total sales price. Hopefully if you find yourself in this situation your Realtor will provide you with an Estimate of Net Proceeds before you sign a listing agreement to put your home on the market.

Another consideration in obtaining a second mortgage is the additional monthly mortgage payments you will make. For instance, lets assume you have a monthly mortgage payment of $1000 which includes the principal, interest, property taxes and homeowners insurance. You take out a second mortgage that will result in a monthly payment of $200 - $400 depending on the size of the loan you obtain. That means your new total monthly payments for your mortgage will be $1200 - $1400 in this example. And as any homeowner knows, this monthly payment increases almost every year due to rising property taxes. Therefore, make sure a second mortgage is the right choice for you. As mentioned above, if youre getting the second mortgage for purposes of debt consolidation of high interest credit cards then it may be a good idea. However, tapping into your homes equity for personal or leisure reasons may not be the best alternative.

A persons home is in many cases a persons biggest asset. As such, think wisely before considering obtaining a second mortgage. For some, there are times when one simply has no other alternative. But if you do, consider those options first.