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Getting a Second Mortgage is a Bad Idea, Here's Why

Getting a Second Mortgage is a Bad Idea, Here's Why

Sometimes when finances get tough, it can be tempting to look for alternative sources, and one of these sources that is often suggested is getting a second mortgage. It might seem like an easy fix, but there’s a huge list of reasons that that’s actually a terrible idea and in this article we’re going to be going over them.


What is a Second Mortgage?


You're probably familiar with what a mortgage is, it’s essentially a loan you take out when you buy a house, where the bank buys the house on your behalf, and you pay it off in Monthly instalments. So where exactly does a second mortgage fit into this?


A second mortgage is reliant on a thing called equity, which in the case of a house is the amount of the house that you own, how much you’ve paid back to the bank and can now claim ownership of.


Say you bought the house for $400,000 and have paid off 50% of the mortgage. That means you have $200,000 in equity, it’s not money you have in your pocket, but it’s money you could make if you sold the house.


Getting a second mortgage takes that equity and turns it into another loan, basically giving that value back to the bank in order to take out a loan on the value of the house.


Why it’s a Bad Idea


You’ve probably already clocked that second mortgages are quite complicated, and that’s the first sign that maybe they’re not a good idea. From a financial standpoint getting a second mortgage is extremely risky. Having home equity is really useful, and gives you a very comfortable safety net to fall back on that second a mortgage takes away. 


Equity also grows in value with the value of the house, your mortgage remains the same but your house gains value over time so eventually you’ll end up with more equity than you’ve paid into the house, unless you get a second mortgage, then it all resets to zero.


It’s also important to understand that a second mortgage isn’t just added to the value of the first mortgage, it’s a second loan that will require a second, separate monthly loan payment, which if you aren’t prepared to take on can be crippling to your daily finances, and without equity to fall back on you may end up in a downward spiral, and we haven’t even mentioned the high interest rates on second mortgages.


Second mortgages are messy business, so unless you really know what you’re doing, it’s our recommendation that you find another method.


That's why we don't recommend a second mortgage (unless you're extremely financially secure). If you have any more questions, please contact us here.

Categories: Uncategorised, General Finance/Credit Score Help