If you are drowning in debt or you have major home repairs that need to be completed, you may be thinking about taking out a second mortgage. It’s understandable if you’re on the edge about this type of loan because it uses your home as collateral. Since it can be such a risk, what situations are necessary for taking out a second mortgage? Here are a few examples of when you should consider taking out a second mortgage.
To fix up your home.
One of the most common reasons to take out a second mortgage is to update or perform renovations on your home. This strategy is an excellent way to increase the equity of your home. This could include updating your kitchen or bathroom or even putting a pool in the backyard. A second mortgage may not seem like a great investment choice at first since you will be putting yourself in more debt. However, as the principal of the loan goes down, the price of your home will significantly increase.
To pay off credit card debt.
If you’re drowning in credit card debt, you are at risk for losing everything. Not only can you lose your car and your belongings, but your income can also be docked from companies that you owe. For people who are struggling with credit card debt, some of the stress can be alleviated with a second mortgage loan. However, keep in mind that this strategy is not a good idea unless you’ve changed the spending habits that put you in debt in the first place. Otherwise, you could potentially lose your house as well.
To avoid private mortgage insurance.
Private mortgage insurance (PMI) is a monthly fee that homeowners have to pay if your down payment is short of 20%. By taking out a primary mortgage for 80 percent of the loan, using a home equity loan, and a smaller down payment there is a chance that you could eliminate PMI altogether. But before you do this, make sure that you would be saving money in the long run. If PMI is cheaper than a second mortgage payment, then you aren’t saving anything.
Some things to consider:
Before you consider getting a loan, you should approach a financial advisor. While these are common reasons for taking out a second mortgage, you may find a better use. Many people use it to get a new vehicle, fund their child’s education, among several other things. Only you and your financial advisor can ultimately decide if this move is best for your personal financial situation. A second mortgage isn’t the answer for everyone, so it’s important to properly evaluate your situation before using your home as collateral in anything.
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Posted on May 22, 2023