Deciding if a Second Mortgage is Right for You

Many financial institutions go out of their way to advise their customers to avoid a second mortgage because of the risk that they might lose their home if they fall behind on payments. However, there are reasons why a second mortgage may be the financial tool you need to make vital financial adjustments. Taking the time to evaluate your personal financial situation and the interest rate available to the loan you are being offered can help you decide whether or not adding another mortgage is a wise financial step.

Evaluating Your Choices

First off, if you are having trouble paying your current mortgage payments then a second mortgage is not the financial tool that will help. Second mortgages often come at a higher interest rate than your original payment arrangement with your lender, especially if you have a low credit score or unstable financial history. Your bank will want to set an interest rate that guarantees they will get enough money back to cover the cost of the loan, even if you default on it. If you have any concerns about whether or not you will be able to pay, do not take out a loan that puts you at risk to lose your home.

Second mortgages often come with many additional requirements and extra fees compared to your original mortgage. You will need to add up these costs to determine whether or not it is a worthwhile financial move to take on this extra debt at the price you will be expected to pay. Consider why you need this money and what you will be paying for with it and whether or not there is a cheaper alternative available before agreeing to any loan. Also, get quotes from several financial agencies to see what the lowest rate available to you is to avoid paying more than necessary to secure your money.

If you are planning major home renovations or are taking on other large bills like student loans then a second mortgage might give you the financial tools to take care of these costs. If you are going to start a payment schedule that requires you to have a great deal of cash on hand, you can take out your mortgage in a lump sum to pay these costs quickly. Once they are paid you can slowly eat away at your second mortgage in low monthly payments.

When consolidating other loans, many choose to use a second mortgage to take care of these costs. This gives you enough cash up front to pay off your other debt, even if you are required to pay fixed interest rates on your previous loans. A mortgage often has a much lower interest rate than other forms of debt, especially credit cards, so you can greatly reduce the amount you will pay over time by consolidating your payments with a mortgage instead of continuing to pay several separate monthly bills.

Like any form of lending, there are pros and cons to taking on a second mortgage. When deciding if a second mortgage is right for you it is important to consider all of these factors and how they would apply to your individual financial situation before making a decision. If possible, talk over these options and costs with a financial planner independently or through your bank so you do not have to worry about making such an important decision alone and wondering whether or not you made a smart financial choice that will improve the quality of your finances.

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