November 28, 2022 | Posted by: Sharon Patton
One of the biggest benefits to purchasing your own home is the ability to build equity in your property. This equity can come in handy down the line for refinancing, renovations, or taking out additional loans – such as a second mortgage. What is a second mortgage? What are the advantages and other things to consider? Let's look below at some answers to these questions.
First things first, a second mortgage refers to an additional or secondary loan taken out on a property for which you already have a mortgage.
This is not the same as purchasing a second home or property and taking out a separate mortgage for that. Like a traditional mortgage, a second mortgage will also come with its own interest rate, monthly payments, set terms, closing costs, and more.
As both refinancing your existing mortgage and taking out a second mortgage can take advantage of existing home equity, it is a good idea to look at the differences between them.
Firstly, a refinance is typically done when you’re at the end of your current mortgage term to avoid any penalties with refinancing the mortgage. In some instances, you can refinance mid-term and blend your rate.
The purpose of refinancing is often to take advantage of a lower interest rate, change your mortgage terms, for investing, debt consolidation, or renovations.
When you get a second mortgage, you can borrow a lump sum against the equity in your current home and can use that money for investing debt consolidation, or renovations. A secure line of credit can also be considered a second mortgage.
There are several advantages when it comes to taking out a second mortgage, including:
The ability to access a larger sum of funds.
Better interest rate than a credit card as they are a ‘secured’ form of debt.
As always, when it comes to taking out an additional loan, there are a few things to consider:
Interest rates tend to be higher on a second mortgage than refinancing your mortgage.
Budgeting for another monthly payment.
Regardless of why you are considering a second mortgage, reviewing your current financial situation is a good idea and determining if this is the best solution for you.
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