Top Three Reasons to Take a Second Mortgage

Like a snowflake, no two borrowers are alike. We all have different financial needs, assets and long-term goals. But we do share some similarities in different loan-specific scenarios. In each of the three following cases, we're going to illustrate why a second mortgage is the ideal lending choice instead of using another mortgage tool, like a cash-out mortgage refinancing.

• Low rate on your first mortgage. Interest rates generally follow a roller-coaster trend, experiencing a fair amount of ups and downs over the years. Unfortunately, the dips in interest rates don't always correspond to the times when you might need to tap your equity. If you're currently at a low rate on your first mortgage, performing a cash-out refinance on your first mortgage may increase your monthly payment and add long-term interest dollars to your bottom line. Crunch some numbers: You may find that a second mortgage would be a better short-term solution. Keep in mind that when interest rates on first mortgages dip back down, you can refinance and roll that second mortgage into your first.
• Avoiding a pre-payment penalty. Lenders make money if a loan is on their books for a certain length of time. If a borrower refinances before the stipulated amount of time is over, the lender loses. That's why many lenders often tack a "pre-payment penalty" onto a first mortgage. The amount of the payment varies, but it can be generally quite expensive. The goal of the penalty is to prevent borrowers from constantly refinancing their first mortgages. Because many pre-payment penalties can equal up to six months of interest charges, they tend to discourage frequent refinancings. If you have a pre-payment penalty written into your first mortgage, you might find that even a slightly higher interest rate will help you come out ahead in the long run, especially when you consider the minimal closing costs of a second mortgage.
• Smaller fees. Borrowers tend to focus on the interest savings with a home mortgage refinance, but closing costs, including the steep fees charged by lenders and vendors, can be substantial. The fees for a second mortgage are minimal in comparison. And, if you have a strong credit rating, they can be non-existent.

All borrowers are different. But as you can see above, there are common scenarios when it comes to loans. If you find yourself in one of these familiar places, a second mortgage can save you quite a bit of money.