Alternatives to Second Mortgages
The biggest alternative to the second mortgage is to refinance the existing first mortgage with an equity takeout. This means a new mortgage and rate replace the existing first mortgage. This can be a benefit if:
- The second mortgage will be much larger than the first mortgage, and the second mortgage rate will be higher.
- Refinancing involves savings on the first mortgage (for example, a better mortgage rate).
- There is an overall cost benefit to refinancing and taking out equity with a first mortgage vs adding a second mortgage.
Other second mortgage alternatives include paying down the existing debt, especially if the debt is relatively smaller and the second mortgage rates/ costs are comparable to what is already paid (often they are!). Finally, an un-secured credit line or loan may be more cost-efficient depending on the funds needed and credit score.
It’s essential that when working with your mortgage broker, options and alternatives are provided based on your situation.
Paying off a Second Mortgage
The second mortgage is typically not seen as a long term financing solution. Even the Home Equity Line of Credit (HELOC) rate is high, typically at ‘prime +’ (at the time of writing, 7.7% for a HELOC).
But whether it’s a private second mortgage or HELOC, it’s important to have a plan to pay off the second mortgage. This plan will often involve a refinance and consolidation with a lower rate first mortgage. Sometimes it’s harder to qualify due to bad credit or lower income, but the plan could involve increasing credit to help pay out the second mortgage,