Pros and Cons of a Second Mortgage
Buying a home is a great way to accumulate wealth. Many homeowners often tap into their equity by taking out a second mortgage. However, when it comes to taking out a second mortgage, the risks cannot be ignored.
Second mortgages have many advantages, but they have weighty disadvantages, too. Ignoring the potential risks can be dangerous.
A second mortgage refinance is similar to your first. It's a loan secured against your house, and the interest you pay is tax deductible. The main difference in a second mortgage occurs in the event you default on your loan. If you ever default on your loan, the lender who holds the primary mortgage is the first to receive any funds recovered from the defaulted loan. The second mortgage lender is next in line. Because second mortgages are a slightly riskier proposition for lenders, they're generally tagged with higher interest rates.
What are the advantages of a second mortgage? If you've built up equity in your home, a second mortgage allows you to tap large sums of money at one time. The money can be used for home improvements, paying for college, debt consolidation, and even paying for private mortgage insurance.
What are the disadvantages of a second mortgage? All the advantages of a second mortgage can turn into a huge disaster if you fail to make your mortgage payment. Your lender could foreclose on your home if you default on the loan and your primary mortgage.
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