A second mortgage can be a useful tool if you want to consolidate debt, invest in a business or pay for a major purchase such as a home renovation. But it is not the right tool for everyone. When you take a second mortgage, you have to keep in mind that you will be adding to your monthly mortgage payments, and potentially jeopardizing your home should you become unable to make payments in the future.
So how do you know if a second mortgage is right for you? To know for sure, you really have to sit down with your mortgage broker and go through the numbers. But here are a few guidelines that can help give you an idea of whether you should opt for a second mortgage.
1. You don’t have much owing on your home.
The more money that you have paid off on your original mortgage, the more equity you have from which to borrow. If the amount of money that you need to borrow only represents a small portion of the equity of your home, then there is a good chance that you are going to be able to keep up with your payments – plus a second mortgage is usually less costly in terms of interest than other forms of borrowing such as credit cards.
2. You have a debt repayment plan.
This is especially important if you are using your second mortgage for debt consolidation. Oftentimes, people will take a second mortgage because the interest is lower than the interest on the debt they are already paying for. They believe that this will help them get out of debt faster. But this is only true, if they are committed to staying out of debt. If you are not willing to forgo that next vacation or major purchase that you want to put on your credit card, then a second mortgage may only serve to get you in more financial trouble than you started with. If you do decide to take a second mortgage, you need to have a plan for getting and staying out of debt.
3. You have an emergency plan.
If you have a solid debt repayment plan in place, you are also going to need an emergency plan. Sure, you may be willing to forgo some luxuries while you get out of debt but what happens in the case of the car breaking down or some other crisis? Starting a savings plan for a rainy day will help ensure that you have money to pay for life’s unexpected events and that you will not have to go back into further debt to finance them.
If you would like to sit down with a mortgage broker and determine whether a second mortgage is the right choice for you, then give us a call today.
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