How To Use A Second Mortgage

Choosing to take out a second mortgage is one of the most practical ways to refinance. So what is a second mortgage, and when does it make sense to use it? This article will cover four reasons to choose a second mortgage over other types of borrowing.

The Second Mortgage

A mortgage is a home loan. Lenders agree to provide usually up to 80% of the home’s value over an average term of 25 years. The loan is secured against the property.

Some borrowers have first, second, and third mortgages secured against their property or properties if they’re investors.

The lender of the first or primary mortgage has priority on repayment of the loan.

For example, if the lender can sell the borrower defaults, i.e. repayments not met, their home. You’ve probably seen a home listed as a ‘mortgagee sale’. This is the lender selling the house to get the principal amount of the loan returned to them.

There is an increase of risk that second or third mortgages are not paid out in full if the home sells for less than the total amount borrowed; hence these loans usually have a higher interest rate.

When To Use A Second Mortgage

The second mortgage is usual when the homeowner needs extra funds. Here are four reasons to use a second mortgage over other types of loans.

Pay Off Unsecured Debt

There are many reasons for getting into debt. For example, credit cards have a high-interest rate, and it’s hard to pay the debt off quickly. Consolidating high-interest loans into one low-interest loan makes sense.

Home Maintenance

All homes depreciate, and as such, they need ongoing maintenance and eventually replacement. A second mortgage is a good fit for providing the funds for home maintenance and replacement projects.

Homeowners of older properties will require more budget for annual maintenance. When you purchase a home, get an understanding of the necessary budget for its upkeep. Older homes may cost less to purchase than newer homes, but you’ll need more of a contingency fund for when things break or are damaged.

Renovation Projects

Home improvement can be a minor job like painting or replacing flooring or significant like adding to your existing floorplan—all homeowners renovating struggle with getting the budget right.

There are always unforeseen expenses for larger projects. A quantity surveyor will help assess the cost of materials, but you may change your mind on what you want, and this is where there is a budget blowout.

A second mortgage can be flexible because if you need to borrow more, you can have enough equity in your home.

Settle Unexpected Debt

Some insurance policies won’t cover ‘act of god’ events. For example, if there’s a weather event that leaves your house uninhabitable or unsafe, you’ll need to cover the expense of work done so you can return home. A second mortgage can make the difference of getting the work done immediately or needing to relocate until you can afford to fix your home.

Unexpected debt can throw any household budget into chaos. The debt could be emergency medical costs that remain outstanding after insurance has paid the bulk of the expense. The sudden need to replace a car or deal with a plumbing emergency is also an unexpected debt.

A second mortgage can cover these and similar emergencies. Best of all, the mortgage buys time to settle the obligation over time while incurring a more competitive interest rate.

Summing Up

When a property appreciates in value, there is an opportunity to secure a second mortgage. Some lenders will allow total home loans to equal 85% of the property value.

Using a second mortgage instead of other loan products makes sense when the interest rate is less.

Plus, there may be some tax incentives for taking a second loan when it’s for home improvements, like improving its energy efficiency. For example, some countries will provide tax incentives for installing solar power or upgrading water cylinders or heating systems.

Caveat emptor: Always get professional advice before taking out a loan.