Second mortgages are not uncommon. Due to tightened lending standards, a home purchase often requires a minimum 20% down payment. Many individuals, especially first time home buyers, take out two home loans. The primary loan pays for the home. The second mortgage pays for the down payment. Current homeowners also use second mortgage to pay for additional home expenses.
A second mortgage may seem harmless it first. But these loans can have negative consequences. If you're planning to take out a second mortgage, whether for a down payment or for other reasons, consider the following advice.
1. If you need a second mortgage for your down payment, you probably can't afford the home. It might hurt to hear this, but in today's fragile real estate market, if you have no cash saved, you're probably not ready to buy a house. It's going to cost you more money than you want to pay in the long term. Second mortgages don't come at the best mortgage rates, and over time you'll have to pay significant interest on your "down payment." Be realistic with your finances. If you don't have enough for a down payment, wait a while until you do.
2. You may not be able to refinance. Maybe you plan to consolidate your two mortgages into one with a low rate refinance loan in the future. This may not be an option. If you've taken out your second mortgage against the value of your home equity, you may not have enough equity left in the home to allow for a refinance. Most refinance lenders require that you hold a reasonable amount of equity. Think twice about taking out a second mortgage if you plan to refinance.
3. Know the difference between home improvement and home repair. Home improvement adds value to your home. Home repair prevents the loss of value to your home. Both of these activities are necessary, but if you're taking out a second mortgage in order to increase your property value to gain a better selling price, make sure that the work you're having done is improvement and not repair. Appraisers aren't interesting in seeing repairs done, though such things are necessary. A second mortgage is best used for improvements.
These tips should help you determine whether or not a second mortgage is a good idea.
