Should You Really Take Out a Second Mortgage?
by Arturo P. Rhine
There are two types of standard home loans on a home: a first mortgage and a second mortgage. The first mortgage is the original mortgage that is obtained to construct or buy the home. The second mortgage is taken out some time later, for a different purpose.
The two most common uses that most people put a second mortgage to are home renovation and debt elimination. Both of these uses can make good economic sense if handled properly.
The only time it really makes sense to take out a second mortgage for home improvement is if the project is going to add to the value of the home alberta mortgage broker. There are some projects that are considered more valuable in the eyes of homebuyers, such as additional bedrooms or a remodeled ktchen, that will make them willing to pay more for the home.
Certain luxury home improvements, such as an in ground pool, may not be as attractive to potential buyers, and would therefore not be considered a good reason for a second mortgage.
Paying off high interest rate debt is probably a better way to use lower rate second mortgages, since you will save a lot of money over time edmonton mortgage rates. If you have credit card rates of 10 to 20%, which are not unusual, you will save a lot if your second mortgage is in the 5 to 9% area.
But be careful to use the loan for its intended reason, and don’t “forget” to pay off those expensive credit card loans.
Since a first mortgage is paid off from the proceeds of the home in case of default, there may not be sufficient equity in the home to pay the second mortgage, and this is the risk the second mortgage lender takes.
For this reason, rates on second loans are higher since the bank has that risk, and the chance of default is higher.
Just as with a first mortgage, a second mortgage will have closing costs. Make sure when you are making the decision about a second mortgage that you are well aware of all of the costs, so that you can make sure they are balanced by the increased value of your home, or the savings in consumer debt.
It really pays to shop around for a second mortgage, since the rates can vary widely. You should also shop around for the lowest closing costs. Closing costs for a second mortgage are a proportionately greater cost since the loan is typically for a smaller amount than a first mortgage.
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