Second Mortgages – Advantages and Disadvantages

Second mortgages refer to second loans secured on property, which already has a first mortgage.  The term second suggests loans of texas that this loan is second in priority. Sometimes this second mortgage is extended by the same lender as the first. But if it is taken from a different source, the lender who extended the first loan gets priority in receiving the payment from the sale of the property in case of default.

Advantages of Second Mortgages

This loan can be advantageous when you are in dire need of money. The credit cards may not be good enough as you can loan only small amounts from it plus the rate of interest on credit cards is too high. Loans received from other sources are also likely to be more expensive and mostly inadequate for your purpose. Though the rate of interest for this mortgage is usually higher than the first but it will still be lower than other sources of loans.

This loan gives you the flexibility of using it for any purpose. You can utilize it for anything from renovating your home to paying fees for your children’s education. Many borrowers also use it for investment in property. This loan can also be used for debt consolidation or for avoiding Public Mortgage Insurance (PMI).

From the lender’s point of view this loan is safer than any form of unsecured loan. Although this loan is less secured than the first mortgage, the lender can still hope to receive at least partial repayment of the outstanding loan amount if you default on this mortgage.

Besides, this mortgage can give you tax benefits, which is not available in case of other loans.

Disadvantages Second Mortgages

Unscrupulous use of this loan can lead you into trouble. If you do not have a proper financial plan, repaying such a big amount will become difficult. Your expenses can exceed your income and ultimately lead you to bankruptcy.

By taking this mortgage you are risking the ownership of your property. If you ever default on the loan you risk losing your most valuable possession.

This loan commands a higher rate of interest than the first mortgage; so it is more expensive.

Most of the time, this mortgage involves some prepayment penalty. If you do not consider this clause carefully at the time of taking the loan, you can end up in a situation when repaying the loan early can be non-beneficial.

From the lender’s point of view, this is not as safe as it is supposed to be. If you fail to arrange for the money, the property will go for foreclosure. But the funds generated from the sale of the property will go to the first lender. Only the surplus amount will reach the second lender. This may mean more stringent repayment conditions on your second mortgage.

The tenure of this loan is usually short and the borrower is under more pressure to clear his debt in less time.

Second mortgages are great financing options, especially when your finances have hit a rough patch. If you decide to avail this loan, you must do it with caution and good financial planning.