When looking for methods of securing down payment assistance, there are two primary ways of obtaining it. Taking out a second mortgage on your home is one of the most common ways to facilitate your down payment.
What Is A Second Mortgage?
As the name suggests, a second mortgage is an additional loan taken out on a property. The difference between an initial and second mortgage is that the latter is made using the equity of the property. In other words, it is obtained after the initial mortgage is secured, and it uses the home in question as collateral.
Benefits of Second Mortgages
Also known as “piggyback” mortgages, second mortgages can provide relief and benefits for borrowers. The most obvious benefit is that borrowers do not need to have money upfront to account for a down payment; since it is often recommended that homebuyers provide a down payment of 20% to obtain lower interest rates and avoid paying private mortgage insurance (PMI), individuals who are unable to pay that much are at a disadvantage financially. Obtaining a second mortgage for the down payment can help borrowers acquire a better deal.
Second mortgages are often granted at lower interest rates, making them easier to pay off, and there are a number of tax benefits to acquiring a second mortgage, as well.
Like all loans, second mortgages must be paid back in full. On top of an existing mortgage, inexperienced individuals may have difficulty in managing their finances. In some ways, a second mortgage can be more risky than an initial mortgage as the property is put on the line; should a borrower default on their loans, they may lose their entire house.
Contributing a sufficient down payment is essential to obtaining a good interest rate when it comes to securing a mortgage. Consider your options in regards to local, regional, and governmental down payment assistance programs before making a decision. While second mortgages can be beneficial for homebuyers by supplying the funds necessary to obtain a low interest rate, individuals should be sure to thoroughly research what is available to them.