Its not surprising that taking a second mortgage is a very popular way of raising money. Your house is your biggest asset and for many people it has greatly increased in value. If you need extra money, borrowing against your home is one of the easiest ways of finding it.
There are several reasons why getting a second mortgage is one of the best ways of raising money.
You get much better interest rates than you would on an ordinary loan, because the second mortgage is secured on your property. This is, of course, provided you have enough equity in your property.
Perhaps you have been watching your home increase in value and realising that you have a useful sum building up in equity. You may be wishing you could get your hands on this money, especially if you are short of cash or need money for some reason, such as starting a business. A second mortgage is a very good way of getting hold of the equity the only other way is to sell up and move, which is really rather drastic!
There is virtually no restriction on what you can do with the money though lenders are more cautious about some uses than others. For instance, if you want the second mortgage to fund a new business start-up, the lender might look carefully at your finances and your business idea. On the other hand, if its for home improvements, the lender will be delighted and might even give you more favourable rates.
But in this life, nothing comes without any risks. In your attempts to arrange a second mortgage, there are some things you need to look out for.
Before deciding on a second mortgage, you absolutely must be one hundred per cent sure that you can afford the repayments, on top of the repayments on your first mortgage and all your other outgoings. Defaulting on your second mortgage can and does lead to repossession.
If the house did have to be repossessed, or if it was sold, the first mortgage lender has priority in the queue for repayment. For this reason, the lender of the second mortgage is taking a higher risk, and consequently the interest rates are likely to be higher than for a first mortgage.
Your existing lender has to agree to the second mortgage before you can take it out. Also you must provide the lender of your second mortgage with details of your first one.
Some second mortgage lenders set a very high minimum loan amount. If you want to borrow a smaller amount, you need to shop around.
Be very careful about borrowing up to the full value of your home. If there is a fall in the housing market, you could find yourself in negative equity.
A second mortgage can be a very good move. Just make sure you go into it with your eyes open.
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