Pros And Cons Of 2nd Mortgages

Amidst the drop in interest rates, the clamor for taking a second mortgage has been increasing. Many Canadians are considering refinancing their homes and using the equity to pay off higher interest debts such as credit cards and personal loans. Although taking out a second mortgage might seem like an exciting proposition, there are certain caveats in doing so. In the following paragraphs, we will take a look at the pros and cons associated with taking a second mortgages.

 

Pros:

A second mortgage will be beneficial for those people who are stuck in a high interest debt such as credit card or personal loans. The rate of interest for a second mortgage is hovering around 5%-6%, therefore, for people with a 20% debt on a credit card, taking a second mortgage can work well. By tapping the equity in your home, you can also pay for some of your imminent needs without taking a higher interest rate loan. 

People who took out their first mortgage when the rates were incredibly high can also benefit from refinancing their home. They can save a considerable amount of money in the long term by taking advantage of the low rates.

Another advantage of taking a second mortgage loan is that the interest that you pay on it is tax-deductible (at least a part of it). Many people who want to benefit from tax deductions can benefit from taking out a second mortgage.

Cons:

One of the biggest disadvantages of a second mortgage is that it means that you have to start from scratch in building equity in your home. It increases your debt-to-asset ratio and it will take you longer to become the owner of your home.

Lenders use the value of the property as collateral while offering you a refinancing mortgages. While it may help you in getting low rate of interest, you run the risk of losing your home in case you face a financial catastrophe.

People who refinance their homes have to pay the charges/fees that are associated with taking a mortgage. Although many homeowners find it unfair that they are charged these fees again, the reality is that these charges can offset any gains that you are thinking of making by taking out a second mortgage.