Most people are familiar with mortgages – the loan they take out to purchase their home. But did you know that there are a myriad of reasons why a consumer would take out a second mortgage? While your first thought may be for purchasing a second home, which is of course one reason, there are actually a few other, less obvious reasons to take out a second mortgage. Let’s take a look.
Four common uses of second mortgages
- Avoiding PMI – if a buyer does not put down at least 20% when purchasing a home, the buyer is often required to take out private mortgage insurance, or PMI. In some cases, it makes more financial sense to take out a second mortgage at the time of purchase to make up the 20% down payment. These are often done as 80-10-10 or 80-15-5 loans, where the first mortgage is 80 percent of the value of the home, the second mortgage is 10 (or 15) percent, and the down payment amount is 10 (or 5) percent.
- Home improvement – a second mortgage can be used to pay for home improvement expenses, such as finishing a basement, upgrading your kitchen or fixing up your deck.
- Debt consolidation – much like a home equity line of credit, a second mortgage can be used to consolidate multiple loans into one, usually at a better interest rate than prior to the consolidation.
- Paying for education – there’s no doubt that higher education is expensive, and another way I’ve seen consumers use a second mortgage is to fund a child’s (or their own) college expenses.
What kinds of second mortgages are available?
There are lots of types of second mortgages. Three options are:
- Fixed-rate seconds
- Fully amortizing
- Home equity lines of credit (variable rate)
Why take a second mortgage?
If you’re looking for a loan to help pay for upcoming expenses, such as one of the examples above, talk to your banker about which loan type may be best for you. The right option often depends on your budget, how you’ll be able to pay off the loan and interest rates. Learn more about home equity loans and lines of credit.