With the cost of many homes increasing and consumer spending at a fairly low point, it’s becoming harder than ever to afford a nice property for yourself or your family. From small apartments to big family homes, the cost of all property has increase fairly dramatically over the past two decades – a major difficulty for first-time buyers and property investors looking to break into today’s market.
While recessions and the up-and-down nature of the property market have certainly had some effect on today’s prices, the market is generally more expensive than it ever has been. Houses attract rates, particularly for new sales, that many investors in previous years would have only dreamed of. But it isn’t necessarily a good thing, as many of today’s millions of homeowners are starting to find out.
Interest rates are down, but many people still struggle to repay their mortgages. Unemployment is up, and many of the people once financially suited to owning a home are no longer so. Salaries for those that are still employed tend to be rather meager and difficult to live on, contributing to one of the worst environments for homeowners in years – and one that’s unlikely to recover soon.
Because of this, many homeowners are taking out a second mortgage on their property, allowing for a greater amount of financing and further increasing the term that they’ll be required to pay back the cost of their home for. The end result is a great deal of debt and a lot of future time spent on paying back their loans – two characteristics that aren’t a great thing for today’s debt-averse environment.
In this guide, we’re going to look at a second mortgage option that could benefit many people – the fixed rate second mortgage. Unlike variable rate mortgages, which can change over time and which have trapped a great deal of first-time home buyers over the past few years, fixed rate mortgages are issued at a single interest rate and stay at this rate for the duration of the loan, aside from small fees.
As such, they’re a lucrative deal for homeowners and those that use them, yet not a fantastic choice for the banks issuing them. Why? Because of the order in which mortgages are typically repaid. As there are two mortgages against a property – occasionally, there are even three or four – the first to be issued is always the first to be repaid. This amplified risk significantly for the second lender.
Why? Because the likelihood of a default, which is already relatively high in many cases, grows a great deal when a second mortgage is added to the home. Likewise, the risk of the borrower never repaying either mortgage, and defaulting on both, is real also. In the end, it’s a significantly larger risk for the second lender than it is for the first – a factor that very often influences the mortgage.
The end result of this is a significantly higher fee structure on second mortgages – generally they have higher fees than an initial mortgage – alongside a greater rate of interest. This means they’re repaid at a greater interest rate than before, and over a longer time period. This leaves the lender in a difficult position – they’re not going to be repaid for a long time, and still manage a lot of risk.
If you’re considering using a second mortgage to improve your home or dedicate more finances to it, it’s important that you invest in the right type of mortgage. Adjustable rate mortgages, which are often referred to as ARMs, aren’t what you should be looking at. Instead, in order to keep your rates of interest constant, it’s worth investing in a fixed rate second mortgage for all of your property.
If you do decide to take out a second mortgage on your home, don’t fret. Due to the rising price of homes and other property, more homeowners than ever before are taking out second mortgages. A clear result of this is that rates are getting lower on the whole due to the greater level of borrowers. This will result in lower pricing for people who use second mortgages, a potential benefit for you.
There are other benefits to using a second mortgage, too. In many states, they offer a range of tax benefits that would otherwise be unavailable, including lower taxes on your home and fewer rates requirements from local governments. This is carried out on a state-by-state basis, however, and it isn’t necessarily the reality in your state, so always check before investing in any mortgages.
Secondly, the great cash injection a mortgage provides can often be used to manage expenses and improve your long-term financial situation, not just to finance a home directly. This adds value to mortgages beyond the standard home financing application. In many cases, adding debt in the form of a second mortgage can actually improve your overall financial situation, even for the long term.
For your home, your apartment, your condominium, or an investment property, a second mortgage is more than just an extra loan. It’s an opportunity – a chance to improve your financial standing in the short and long term, all the while assisting with your home-related payments. With strategy and planning on your side, a fixed rate second mortgage can prove to be a huge financial improvement.