If you’re a homeowner and you run into financial difficulties, there are a few options available to you to raise some quick cash. You can apply for a loan; maybe sell some items on ebay; or you can take out a second mortgage. This last option allows you the chance to have much more extra cash than a loan or ebay would. However, there are some pitfalls that you need to be made aware of.
Is it the same as a Remortgage?
One of the biggest mistakes people make with a second mortgage is confusing it with a remortgage. Although they may sound similar, they’re two completely different things. Whereas a remortgage sees you transferring to a different lender for a better interest rate, a second mortgage is exactly what is says. This means that you now have two mortgages to worry about.
So although it can mean extra cash when you most need it, you need to take a look at the long-term effects of taking out a second mortgage on your home. Just like with your original, missing payments or defaulting on a second mortgage could see you lose your home.
How it Works
Just like you had to pass a screening process when you bought your first home, you’ll need to go through it all again if you apply for a second mortgage. If you have good credit, and the loan offers good value to the lender as well as you, then you shouldn’t have a problem. If you have poor credit, then you might struggle to be approved (although you can find specialist bad credit mortgage companies and lenders).
The equity in your home is also a key factor in whether you’re approved for a second mortgage or not. If the value of your home has increased, then again that will act in your favour. The good news here is that property value has risen steadily over the last 5 years in the UK, so you’d have to be extremely unlucky not to see your home worth more now than when you bought it.
Pros and Cons of a Second Mortgage
As well as allowing you access to emergency cash funds, a second mortgage also offers you a far better interest rate than those you would find on a more “traditional” loan. This is because the interest you pay is a mortgage interest rate, as opposed to a higher rate through a bank or loan company. It’s also a far cheaper option than using your credit card to help you out of your dilemma. Of course, there is a drawback.
The reason that a second mortgage is so cheap compared to normal loans is that it’s a secured loan – meaning that it’s secured on your property. Which, in turn, means that you’ll potentially lose your home if you don’t meet the payments. Even if you take the second mortgage out with a different lender, they can still seize your home if you miss your payments, regardless of whether you’re up-to-date with your original mortgage.
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