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Advantages & Disadvantages of A Second Mortgage

By Sari R. Updated on 6/22/2015

A second mortgage is a mortgage that is taken out in addition to the primary mortgage on your home. Many people take out second mortgages because they are in need of financial help for home improvements or want to buy an investment property. Depending on your unique financial situation, a second mortgage has both advantages and disadvantages:

Advantages

Access a Large Amount of Money.

Because you're not taking out a loan and the money is directly tied to your home's equity, you will be able to access a larger amount of money than you normally would through a loan or your credit card.

Lower Interest Rate.

If you borrow money through a second mortgage, you will pay a much lower interest rate than you would if you were paying interest on a loan or credit card bill.

Tax Deductions.

Your interest on the second mortgage is also tax deductible, similar to the interest on your first mortgage. This is not true for your interest on a bank loan or credit card debt.

Disadvantages

Your Home is at Risk.

If, for whatever reason, you can't pay your second mortgage, your home will be used as collateral and could end up being repossessed. Depending on the reason for the second mortgage, this may or may not be worth it.

Refinancing is Difficult.

When you have a second mortgage, refinancing will be difficult because your LTV ratio will be extremely high. This is something you will need to take into account if you find your financial situation could change at all.

You Will Have Substantial Fees.

There are a lot of fees associated with taking out a second mortgage, like closing costs, a home appraisal, and origination fees. You may find that these fees outweigh the pros of securing the second mortgage.

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About The Author:
Sari R.
Sari R. is a mortgage editor for Lender411com. She graduated with a Bachelor's Degree in Screenwriting and Public Relations/Advertising from Chapman University. She can be reached at sarelyn@lender411com.

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