Pro & Cons of Getting a 2nd Mortgage or Home Equity Loan
A home equity loan is a real estate-based loan where the borrower's property is used a collateral and security to provide repayment to the lender should the loan default. If the property already has a mortgage on it, the loan is considered to be a 2nd mortgage. The lender who holds the primary mortgage is paid first in the event of a loan default.
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Pro: Large Sum of Money
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When a homeowner needs a large sum of money, much more than could be placed on a credit card or available through a small personal loan, a home equity loan is a good alternative. Projects such as major home repairs or putting an addition onto the house require thousands of dollars, and are often funded by home equity loans.
Pro: Line of Credit
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A home equity loan can be structured to provide a continuously available line of credit. A check can be written at any time and for any amount up to the credit limit without having to apply for a loan. This also makes money instantly available in the case of an emergency.
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Pro: No Primary Mortgage Needed
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If a homeowner needs a large sum of money, one option is to refinance his current mortgage. However, if he has great terms (a low interest rate, for example) for his mortgage, he may not want to refinance and lose those terms. In this case, taking a 2nd mortgage may be a better financial decision, and leaves the first loan in tact.
Con: Risk
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Defaulting on a loan that uses your home as collateral may result in losing your home. Also, people may be tempted to use the money foolishly. Having access to thousands of dollars at one time is not good for those who do not handle money well.
Con: Two Mortgage Payments
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Borrowing against your home for a 2nd mortgage will result in having another monthly mortgage payment, and one that is usually at a slightly higher interest rate. Since the 2nd mortgage lender is not be able to get paid until the first lender is paid, the 2nd mortgage loan is riskier and thus incurs a higher interest rate.
Con: Higher Closing Fees
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There may be additional fees charged for qualifying for a 2nd mortgage, and much more involved paperwork. Sometimes these associated fees can be significantly high enough that if the money is only needed to be borrowed for a short time, the cost to get the loan may not make it a viable option.
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