Risks of a Second Mortgage Loan

A second mortgage loan can seem quite tempting, but it is very important to understand that it is also quite risky. A second mortgage loan can put you at greater risk upon default than your first mortgage.

How a second mortgage loan works is that it is second behind the first mortgage. If you default on your second mortgage, no matter the status of your first mortgage, you can still lose your home. What will happen is the lender will pay off the first mortgage so they can then seize your home.

It is a huge risk because you will lose your home and have to pay off the two mortgages. A second mortgage loan can put you in financial troubles that could ruin your credit and financial stability. That is why you must understand the risks.

Penalties to Think About

Default penalties – This penalty is charged if you are late or miss a payment. One missed payment could rack up some huge penalties that could make it very difficult for you to get back on track. Avoid a second mortgage loan with this penalty.

Prepayment penalty – While it may seem silly, lenders do charge you fees for paying off your loan early. That is because they are losing out on all the interest you would have paid if you had paid out the whole length of the loan. You can avoid these, though.

These two penalties are something to consider. Both can really mess up your plans to pay off your second mortgage loan and could put you at risk of default. Watch out for the penalties and avoid them if possible.

Know the Costs

You may find a loan with great terms and rates, but you also need to remember the costs associated with actually getting the loan. You will need to pay:

- appraisal fees
- application fee
- closing costs

Make sure these costs won’t put you in a bad financial situation. You do not want to end up late on your first loan payment.

The Risk

When you are considering a second mortgage loan you have to make sure you can afford it and that goes well beyond being able to afford the monthly payment. If your budget is tight you can afford to have surprises come up that require extra money.

Overall, you really just have to make sure a second loan fits into your budget. If you are smart about it and figure in all the costs and possibilities then you should be able to get a second mortgage loan without any fear of losing your home.