Three Common Second Mortgage Mistakes

Before you decide to apply for a second mortgage on your home, its important that you familiarize yourself with what could go wrong. A simple second mortgage mistake could result in you paying hundreds, or even thousands, of dollars more over time than you need to.

Ignoring Cash-Out Refinancing Options

A second mortgage allows you access to the equity you’ve built up in your home. Second mortgages, however, are often awarded as a line of credit. With a cash-out refinance, you can access your home’s equity while also gaining a lower interest rate on your primary mortgage loan.

Failing to Shop Around

Interest rates may vary significantly depending upon the lender. If you obtain a second mortgage through your current lender or through your family bank, you may not be getting the best possible rate. Higher interest rates cost you more money over time.

Not Checking For Prepayment Penalties

When you sell a home with a second mortgage, you can pay off what you owe and walk away--unless you have a prepayment penalty. A prepayment penalty forces you to pay the full amount of the second mortgage loan plus a percentage of the amount the bank would have recovered from you in interest had you paid off the loan gradually. Refinancing in the future can also trigger a prepayment penalty. Read your loan contract carefully to avoid unpleasant surprises.