There is nothing wrong about taking second mortgages. In reality, you could use the loan amount to make further investments or to add to your business capital. But there are still numerous pitfalls that you should avoid. There are numerous things you should always consider before and during filing of applications to take any of available second mortgages.
Interest rates
In general, second mortgages implement higher interest rates. This is logical because lenders are taking greater risks in providing such loans. If you would get into default on your loans, you are required to first settle your primary or first mortgage. Only after settling your first home loan would you be required to take care of the second.
Check the APR (annualised percentage rate) applied. It is advisable not to immediately apply for the second mortgage you find. There could be other second mortgages with lower APRs. As you perform a comparison before your decision, get quotes from several banks, credit unions, and dedicated mortgage lenders so you could logically find the best product there is for you.
Fees, penalties, and other costs
There are fees that come with second mortgages. Those should not be neglected. You may be required to shoulder an appraisal fee upon loan application. The fee would enable the lender to appraise your home for the loan. It could be part of possible application costs that are usually collected for second mortgages. Be warned that such costs may not be possibly refunded in case your loan application is disapproved or declined. Check out how much processing fees are for each second mortgage before you decide which to take.
Find out if the second mortgages you are considering are bundled with voluntary insurance. Of course, it would add to the costs of taking a second home loan. In reality, such an insurance coverage may not be necessary anymore, although it could be useful. You may have sufficient insurance coverage outside the mortgage.
Look at the default penalties applied by second mortgages. Lenders would certainly penalise you for missing any payment processing or failing to repay on time. Find out how much such penalties are and compare. Different lenders impose different amounts of penalties.
Terms and conditions
It is a must to carefully read and understand the terms and conditions of all second mortgages you consider taking. When you compare to choose the best, do not focus on just the rates and fees. Look at the terms and conditions because there could be many other provisions that could make second mortgages advantageous or disadvantageous.
Check out any balloon payment. Most second mortgages initially offer low and more affordable payments. Those usually require bigger payments at the end of the loan. Carefully read the loan contract to find out if such balloon payments would be ideal for your situation.
Lastly, do not fail to look at any prepayment or early repayment penalties. Yes, you may even be penalised for settling the loan in full before its specified maturity date. The amount could still be significant.
Andrew has been working in the finance industry for several years, specializing in debt consolidation solutions.