Got A Second Mortgage

It may sound terrible, but I got a second mortgage. Don’t worry, I’m not in need of fast cash.  Let’s discuss.

Options

Our home went up significantly in value over the past year which gave us some options. The money is trapped in the house (this reminds me of Zoolander), so unless we sell we wouldn’t realize the gain. However, this is America and of course there are financial options to take money out of your house.

One option is a reverse mortgage which is not of interest and only available to those 62 and up.

Another option is a HELOC which stands for Home Equity Line of Credit. This works like a credit card and often has rates above 5%. One downside to a HELOC is it is up to the bank to provide it and they have the right to take it away at any time. So if there is a recession and you are squeezed for money and you turn to your HELOC it may no longer be available.

Another option is a home equity loan. This is also known as a second mortgage. This takes money out of the equity in the home. Equity is the difference between the amount you hold in your loan(s) and the value of the home.

Pros

• Money Now
  • Having money is great when there are deals on things to buy. This could mean I could buy a rental property now or when prices dip. I could pick up stock at a discount if there is a downturn. Really it is just money, so you can do whatever you want with it.
• Emergency funds
  • This is dependent on your mentality. I think of it like this. Would you rather have $20,000 in debt with $20,000 in cash or $0 debt but no cash.  I choose the first because I could immediately pay off the $20,000 and be in situation two. However, more importantly, if I recession comes and we are laid off I can survive many months with $20,000 rather than scramble for options.  We already had an emergency fund, so this isn’t my primary reason, but it is great to have more cushion.

Cons

• Closing costs
  • Depending on the lender you could have lots of closing costs. Mine were only $525 to pay for the appraisal.
• Interest
  • It isn’t fun to pay interest on anything. However, if you use the proceeds from the second mortgage for home improvements you can deduct the interest on your taxes.
• More debt
  • Most people would probably be happy with less debt, so taking on more means you have to pay it off. At this point in my life I’m comfortable with the debt given our situation with two jobs and a home that still has equity in it.

Conclusion

I ended up going through a credit union because their rates were significantly better than other lenders. The rate was 3.75%, which means I need to earn 5% returns to breakeven (due to taxes on gains) which is below the historical average so I’m not too concerned. Furthermore, I have more investment opportunities available such as a rental property. Would you be willing to unlock the equity for a fee?