For many homeowners, the idea of taking out a second mortgage on a property is a scary experience. Instead of having one debt obligation to manage, you’ve got two. Although it doesn’t make sense in every situation, there are times when it could save you some money.
You’ll want to evaluate the offer of a second mortgage carefully before agreeing to anything. It often comes with a higher interest rate, requires closing costs and fees, and could require points. That can make the offer much less attractive.
Here are the times when it does make sense to look at this second trust junior lien as a financial option.
1. Avoid PMI
If you can avoid private mortgage insurance by using a second loan, the savings can be significant. Although it’ll add to the debt you’ll be taking on without a substantial down payment, the long-term benefits often outweigh the risks. You will want to consider your income carefully to ensure your LTV ratios aren’t too high.
2. Stay Within GSE Limits
As prices keep rising for homes, it’s not unusual for buyers to find something that exceeds the loan limits for Fannie Mae, Freddie Mac, or PennyMac. These mortgages go to a jumbo loan that has a much higher interest rate. If you get a second mortgage instead, the interest rate for the primary loan could be a lot less.
3. Debt Consolidation
If you use a second mortgage to pay off high-interest short-term debt, you can save a lot of money. The key to a successful experience with this option is to have the financial discipline to avoid using your credit cards even more.
A second mortgage doesn’t make sense for every idea, but it can save you some money in some specific circumstances. If you keep all of those options in mind,