Is Carrying a Second Mortgage Risky?
- A second mortgage can include a home equity loan or home equity line of credit, in which borrowers acquire cash or access to a revolving line of credit using their home's equity as collateral. Property owners can usually borrow up to 80 to 125 percent of their home's value, and with the funds they can consolidate their consumer debt, renovate their homes, pay for schooling or take care of other personal responsibilities.
- Carrying a second mortgage on a home creates an additional lien on the property. Property owners have an additional monthly expense, and they're obligated to make timely payments to the lender that approves the second mortgage. Defaulting on a second mortgage increases the risk of foreclosure, even if a property owner pays her first mortgage on time each month.
- Debt consolidation is a common reason to carry a second mortgage. And while the interest rate on a home equity loan or home equity line of credit is often cheaper than the rate on most credit cards, the rate on the second mortgage is typically higher than the rate on a first mortgage. Plus, second mortgages generally have reduced loan terms -- about 20 years. Reduced terms and higher interest rates can increase monthly payments; and if unable to keep up with payments, borrowers run the risk of foreclosure. Borrowers need to assess their finances and only apply for a second mortgage if they're confident in their ability to manage the payments.
- Borrowers who take out a second mortgage to consolidate their debt increase their risk of doubling their debt load. Second mortgages are advantageous for paying off credit card debt. However, if unable to control spending and credit card usage, some borrowers may re-accumulate credit card debt before paying off the second mortgage, increasing their monthly obligation.
