When to Consider a Second Mortgage (And When to Avoid It)

Over half of American homeowners financed their home purchase and have a mortgage. Banks and lenders like this arrangement because they earn money in the form of interest payments when they loan money to buyers. Buyers like it because they are able to purchase a home without having to save for years and years to pay for the entire thing at once. So if getting a mortgage to purchase a home is good, getting a second one must be better, right? Sometimes yes and sometimes no.

You should consider getting a second mortgage on your home if:

– You are using the second mortgage as part of the down payment on your home purchase to avoid paying Private Mortgage Insurance, or PMI. Your rate on your second mortgage will likely be higher than your first mortgage, but still lower than PMI payments. You should calculate all of the options before deciding.
– You are consolidating unusual debt (such as one-time emergency medical bills) to lower your monthly payments or pay off debt faster.

You should look at options other than a second mortgage if:

– Paying the second mortgage payments will put financial strain on your budget. You don’t want to risk losing your house because you miss payments.
– You are consolidating lifestyle spending debt. You first need to address the spending habits that got you into debt in the first place.
– You don’t have a plan to pay off the second mortgage. No matter what you use the money for, you should have a plan to pay it off or risk losing your house if you miss a payment.

Second mortgages can be useful tools but should be treated with the same budget scrutiny that you do your initial home purchase. Only take out a second mortgage if you have a clear plan and budget in place to pay it off.