If you are a home owner, then you know exactly what your largest asset is: your house. Most people never buy anything more expensive than a home, which is why it is your “ace in the hole”. When you are forced to tighten the purse strings a bit and unexpected bills catch you off guard, your first instinct might be to tap into the only resource that can help you out. Borrowing money against the equity in your home and in addition to your first mortgage is called a second mortgage, or an equity line of credit.
You can use a second mortgage to finance your child’s college education, to make much-needed home repairs, to purchase a car that you desperately need or to make any kind of purchase for which you do not already have funds. Does this mean that you should do it? As with anything, there are several pros and cons, and the answer varies from individual to individual.
First of all, you should never borrow against money that you might need later on. If the second mortgage will be for something that can wait, or something that isn’t absolutely essential, you might want to consider putting it off for a while or looking into other financing solutions. When you take out a second mortgage on your home, you are slowly leaking the equity you have placed in your home. And, if you were to lose your job or to need the money for something else, you might end up losing your home when you are unable to make payments on that second mortgage.
Furthermore, the economy and the real estate market fluctuate on an almost daily basis, leaving it difficult to forecast your financial future based on the equity in your home. If, five years down the road, your property value decreases significantly, you could end up owing more on your home than it is worth, making the property itself a nearly worthless investment.
I said in the beginning that your home is your largest asset – which is true – but if you continue to borrow against your equity, you could find yourself in a financial black hole with no way to pay off the debts that you owe.
One positive thing about a second mortgage is that it is a fixed loan. A credit card, by contrast, or a home equity line of credit, will have a variableinterest rate, which means that the amount you pay back each month can fluctuate based on the current rate of interest. With a second mortgage, you will know exactly what your monthly payments will require, and you can better plan for your financial future.
Your best bet in making this complicated decision is to carefully examine your monthly budget. Most Americans do not take time to sit down once a month and look closely at their spending habits – that is, how much money is coming in, and how much money is going out?
Look at your income – and all other incomes that benefit your household – and write down all of your monthly bills. Include estimated allotments for gas, food, memberships, and any other monies that leave the bank every month. That should give you an idea of how much money you will have to “play with”.
Next, obtain quotes from your current mortgage lender as well as at least three other financial institutions to determine how much a second mortgage will add to your monthly bills. Can you conceivably afford to add that amount to your outgoing money every month, or will it strap you too tight? What about your savings? And any future expenses that will crop up in a few years, such as children going off to college?
The largest mistake that homeowners make when it comes to second mortgages is going in blind. You wouldn’t make a several-thousand-dollar purchase without seeing the product, so why borrow money when you have no concept of your financial situation?
Sometimes it helps to speak with a financial advisor before making large financial decisions. A professional can help you take a logical glance at your financial records, and will help you to determine the possible risks and benefits. This can help you to make an educated decision regarding second mortgages.
These days people are even taking out third mortgages read our information to better your decision on whether you need a third mortgage or not.