When a family buys their first home, it’s hard to comprehend the necessity of taking out a second mortgage. After all, an initial mortgage loan can extend anywhere from 15-30 years, which can seem like a lifetime to first-time homebuyers. Yet these days, it is becoming more and more common for homeowners to take out a second mortgage before their first is paid off. While this decision should not be entered into lightly, there are some scenarios where it can be appropriate.
What To Know About Second Mortgages
The definition of a second mortgage is fairly straightforward: it is just an additional loan that is added to your initial home loan. (This should not be confused with the process of refinancing your home, which allows you to alter the terms of your initial loan). The process of taking out a second mortgage is not too different from taking out a first mortgage. You will still have to complete a thorough application process, and you will still want to decide what loan type and interest rate (e.g. variable or fixed) will be right for you. The primary difference is that in this case, you will essentially be leveraging the equity in your existing home.
When Your House Falls Apart
Even if your home is in good condition at the original point of sale, there will inevitably be a need for some repairs down the line. You could be halfway to the payoff date on the initial mortgage when you discover that your roof needs to be re-shingled or the exterior of your building needs new stucco. Such projects require fairly urgent attention, and can cost tens of thousands of dollars depending on the size of the house. Thus, the necessity for major repairs is one viable reason to consider taking out a second mortgage.
When Your Kids Go to College
The second major expense that homeowners will likely face in their lifetime is college tuition. With tuition rates continually on the rise, it is becoming less and less possible for parents to help their children pay their way through school out of pocket. While student loans are an option, interest rates are also on the rise—and no parent wants to see their child saddled with copious amounts of debt right after school. Thus, if you have children heading off to a prestigious university (which can cost upwards of $250,000 over four years), a second mortgage can be useful.
Warnings and Caveats
While a second mortgage might be necessary to cover unexpected repairs or expected college tuitions, that does not mean it is appropriate to cover other kinds of debt. In fact, there are few other scenarios where such a hefty loan would be required. For instance, avoid taking out a second mortgage to pay off large amounts of credit card debt. This does not really eliminate the unsecured debt, but simply shifts it to your home, leaving you vulnerable to racking up more credit card debt on your now “empty” cards.
Before opting to take out a second mortgage, it is important to make sure you will be able to make the payments. Most financial advisors suggest offering a 10% down payment as well, to expedite the pay-off process. After all, if you aren’t able to stay current with your second mortgage payments, the loan will ultimately do more harm than good.
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