How to Decide If You Want to Take Out a Second Mortgage
by Arturo P. Rhine
First mortgages are obtained out when a home is first purchased, while second mortgages are taken out some time later, when the equity in the house has grown. Therefore, the purpose of the second mortgage is not to finance the purchase of the home.
Second mortgages are usually obtained to perform some substantial improvement to the home, but frequently homeowners decide to use the increased equity in their property to take out a second mortgage and pay down consumer debt.
A home improvement is a good reason to take out a second mortgage, but you should be sure that the improvements you make are going to do are worth the additional payments you will be making.
Some home improvements, however, are really just luxuries and will not affect the future value. An in ground pool is an example that is frequently mentioned, since there are many buyers (with young children, for instance) who would not care to have one.
Many credit advisors recommend using a second mortgage to those homeowners who are paying high interest rates on consumer debt edmonton mortgage brokers. Typically, a homeowner would want to pay down consumer debt, such as credit card debt that may have interest rates of 16-20% with the proceeds from a second mortgage, which may have a rate of 5-9%.
But to take out a second mortgage that it not going to achieve either of these ends-add value to the home, or save money on consumer debt- is not a good choice.
Second mortgages are exactly that in actuality as well as in name, since they are paid down after the first home loan is paid, and the bank has to hope there is equity to cover it.
For this reason, rates on second loans are higher since the bank has that risk, and the chance of default is higher.
Second mortgages have closing expenses, so you should be careful about them and make sure that they do not render the second mortgage so expensive that it will not balance out the savings you believed you would have.
Rates on second mortgages can vary greatly, so it really pays to shop around, not only for the base rate, but also for the lowest package of closing costs. Since the loan amount of a second mortgage is typically not as high as a first mortgage, small differences in rates and costs can have a proportionately higher effect on the cost of the loan. calgary mortgage brokers
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