Second mortgages are a huge commitment that you shouldn’t enter into lightly, as they carry many risks. It pays to know what you’re getting yourself into before you sign on that dotted line.
To begin with, be careful of second mortgages that seem like they are for small amounts, but last for a very long time. A common trick is to get you to borrow a relatively small amount of money and then pay it back over 10 or 20 years at a small amount per month. Unless you add it up, you might never realise that you can end up paying back more than twice what you borrowed.
Interest is generally quite high on second mortgages, because of the risk the lender is taking. While you are warned that you’re using your house as security and it may be repossessed if you can’t keep up the payments, in reality any proceeds from the repossession of your house will be used towards the repayment of your primary mortgage before the second lender ever sees a share.
Of course, the biggest risk on a second mortgage is the one you’re taking yourself. Releasing the equity in your home assumes that house prices are going to either stay stable or keep going up. If house prices ever go down, having a second mortgage makes you much more likely to find yourself trapped in a negative equity situation, and so unable to move house without massive expense.
The same thing applies if you’re thinking of taking a second mortgage that pays out more than 100% of your home’s value. This is speculation, but even worse than just betting that house prices will stay level – it actually bets that they will go up by however much extra money you just took! Be very careful, as this could potentially leave you in a very bad position, even if the market is merely underperforming rather than outright tanking.
John Gibb is the owner of second mortgage guide For more information on second mortgages check out http://www.2nd-mortgage-guidance1k.info