Is a second mortgage right for you? The pros and cons

Thursday, 09/04/2015

A second mortgage or, as some lenders like to call it, a home equity loan, can be a helpful way to raise credit based on the value of your house. Yet, there remain many people who feel uncomfortable with taking such a measure and, when you look at the situation, who can blame them? After all, it does mean risking the most valuable thing you own.

So, while second mortgages might be perfect for one borrower, they may be too perilous for another. How do you decide which one you are? Consider the following advantages and disadvantages and how they apply to you.

The pros:

• The interest rates are low

Generally speaking, if you are planning on taking out a second mortgage, you will be offered pretty good interest rates from most loan lenders. Regardless of the dips and swings in the property market, a house is an impressive piece of collateral, so banks, creditors and mortgage providers will really play ball once you put it on the table. 

• Longer payment period

If you want to raise money quickly but want to pay it off slowly, say as part of a business investment, a home equity loan can be just the ticket. Lenders will often give you a long period of time to repay your second mortgage, meaning smaller monthly instalments that can be very welcome in the short term. This is, however, only a partial pro, as it will mean you pay back a larger amount over the entire period due to interest. 

The cons:

• The risk

Obviously, if you can’t pay back your second mortgage, the creditor can foreclose on your house. Therefore, if you are unsure about your ability to pay back your second mortgage, do not take it out under any circumstance. The risk is simply too great. 

• You might be better off going unsecured

In truth, you should only be looking at a second mortgage if you need a large amount of cash that you know you can repay. If you just need a small line of credit, you are almost certainly better off with unsecured instalment loans, credit cards or overdrafts.

A second mortgage offers many advantages to the smart borrower with good credit and a solid plan for repayment, yet the risks are high. Be sure that is the most suitable choice for your situation before you proceed.

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