After much consideration, you settled on a mortgage to help buy your home. Now that you're a proud homeowner, you may eventually find yourself in the position to need or want a second mortgage. Here's what you need to know:
Reasons to Get a Second Mortgage
Although this is not a complete list of reasons to take out a second mortgage, here are some of the more common scenarios:
- Eliminating PMI -- You're often charged private mortgage insurance (PMI) when you don't have a 20 percent down payment. A second mortgage can eliminate PMI by covering the rest of the 20 percent.
- Covering big expenses -- A second mortgage is a common method for funding home renovations, college tuition and other large expenditures.
- Paying down debts -- A second mortgage can also help pay down student loans or credit card debt (as long as the interest rate is lower than what you're currently paying).
Types of Loans
Once you start looking into second mortgages, you'll find that they all generally fall into one of two types:
- Home equity loans -- You borrow a lump sum and pay it off monthly over a set period of time. The interest rate on home equity loans is typically fixed.
- Home equity lines of credit --You have access to a set amount of money over a set period, tap into it as needed and only pay back what you borrow. Interest rates are typically adjustable.
Of course, there are pros and cons to each type. So it's a good idea to talk things over with a trusted adviser to make sure your second mortgage makes sense financially.
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