For most people, a negative connotation comes to mind when they hear the term second mortgage. This is because most people believe that only those people who are broke and are in desperate need for money are the ones who take out a second mortgage. While second mortgages were once stigmatized, many homeowners nowadays get hold of second mortgage. Since money, unfortunately, doesn’t grow on trees, they now see it as a realistic option for getting the money they need. But should you?
Here are the pros and cons of getting a second mortgage.
Home improvement projects
The money from a second mortgage can be very helpful if you use the funds appropriately. One way to put your equity to good use is by using it to tackle some improvement projects.
If you discovered that your roof is leaking, you can use the money to have it repaired as soon as possible. Addressing the issue early will prevent it from turning into a more complicated and costly problem. Plus, home improvement projects can help increase your home’s value.
As long as you follow the IRS’ rule, the interest on a second mortgage is tax deductible. If you itemize your deductions, you can actually deduct the interest you pay on your second mortgage.
Just like first mortgages, there are some steep fees associated with securing a second mortgage. Borrowers will need to pay for application costs, appraisal fees and other closing costs.
Higher interest rate
Since the lender is taking more risk, the interest rate on a second mortgage is usually higher as compared to the first one. With the higher interest rate on the second mortgage, it is important that you factor in the mortgage payment into your household budget and make payments a priority.
A second mortgage is a loan that is taken out against the value of your property. That means you can lose your home if you fail to repay your mortgage. Plus, you could end up owing more on your loans if your house loses value. Before you close, make sure you’ve thought through the decision and you know the risks.