When it comes to mortgage debt, Florida ranks 20th in the United States. The average borrower in the Sunshine State owes more than $183,000. But the median household income in the Sunshine State is the 12th-lowest in the land, at $52,594 only.
For this reason, borrowing more against your house could prove challenging to handle. Although taking out a second mortgage (like a home equity loan and a home equity line of credit) has lots of merits, any mortgage lender in Naples, Marco Island, and Everglades City will say that it’s not without complications.
Increasing Your Risk of Foreclosure
Applying for a second mortgage means giving up some of the equity you have built on your property over the years.
Equity is what remains after the principal balance on your mortgage is deducted from your house’s market value. In other words, it represents how much of your home belongs to you.
It could decrease on its own if property prices drop in your area. But if you are not yet free and clear, getting another mortgage when your current one has not been paid off will increase your chances of facing foreclosure.
If you have a second mortgage, it will give you another bill to worry about. You might have to pay for it right away (as in the case of a home equity line of credit), you will have to deal with it eventually. When that day comes, you better have enough room in your budget, or else you might fall behind on your payments.
So how can home equity be of your help if and when you become delinquent? It will give you more flexibility to get rid of your mortgage debt. If you have zero or negative equity, selling your property in hopes of repaying all of what you owe will unlikely be an option since the value of your liability will be higher than your asset’s worth.
Paying More Interest
Compared to unsecured loans, secured ones are married to lower interest, for you will pledge some valuable collateral to minimize the lender’s exposure to risk. In the case of a second mortgage, security is the portion of home equity.
However, the interest rates of second mortgages are usually higher than those of primary mortgages. After all, the lender of the second mortgage is paid second in case of a foreclosure, so the risk is inherently higher.
Struggling to Refinance
Refinancing your first mortgage if you have a second mortgage can be challenging. Once the first mortgage is paid off via refi, the lender of the second mortgage will have the primary debt position. The lender of your refinanced mortgage then gets the second spot.
It can be hard to convince a lender to refinance your mortgage without the guarantee of being paid first in case you default on the new loan. You will have to go through the resubordination process and convince the second mortgage holder to agree.
Taking out a second mortgage is not for everyone. If you feel like it will not be a good option in your situation, strongly consider refinancing your mortgage and cashing out some of the home equity into cash. This way, you will ultimately carry just one mortgage with substantial funds that you can use for whatever you want.