When to Consider a Second Mortgage

As your largest asset, your home carries a lot of weight in terms of your current financial health and your future financial goals. Using your home as collateral, you can acquire a second mortgage to rectify money troubles or attain something you’ve always dreamed of having for yourself. Whether to get out from under an outstanding debt or to renovate your kitchen, you must first determine if it’s appropriate to take out a second mortgage on your home.

Debt

It might be tempting to take out a home equity loan or home equity line of credit to pay off debt, particularly if you are having difficulty making payments. Taking this route to pay off an overloaded credit card will all be for naught if you do not then take the effort to curb bad spending habits. With no balance to pay on your credit card, you might find yourself tempted to overspend again, which can leave you right back where you started.

Using a second mortgage makes the most sense in instances where the debt carries a higher interest rate than the home equity loan or home equity line. If, for example, you would pay 10 percent interest on your second mortgage, it would be more beneficial to use that money to pay off a credit card that carries a 20 percent interest rate. A home equity loan or line of credit can come in handy when paying off medical expenses not covered by insurance.

Home repairs and renovation

Whether it’s the joy of renovating and updating your home or the pain of necessary repairs, the task of being a homeowner is one that is never finished and seldom inexpensive. Borrowing against the value of your home and taking out a second mortgage can prove an attractive and effective route for financing a new roof or kitchen remodel.

Using a second mortgage to pay for home improvements also proves attractive to lenders because you have a greater likelihood of repaying the loan. This is because making renovations or repairs directly improves the value of your home, meaning you’ll be able to command a higher price if you should decide to put it on the market.

Potential tax benefits are available when using a second mortgage toward the renovation or purchase of a home. In some cases, home equity loans and home equity lines of credit are tax-deductible if the money is used toward the substantial improvement, construction or purchase of a home. This, in turn, helps to offset some of the costs associated with taking out the loan.

It is in your best interest to take out a second mortgage only for home improvements that are essential and pressing, like a leaky roof or foundational problems. If your project is optional, like renovating the bathroom or finishing the basement, consider saving up over time and minimizing the need for a lump sum by completing the job in phases, if possible.

Other situations might arise that could call for taking out a second mortgage, be it helping to fund your child’s education or providing for your family after losing your means of income. Whatever the circumstance, it’s important you shop around to find the best deal available to you, and that you are keenly aware of the responsibilities involved.

The Institution ID numbers for First Bank & Trust charters with the NMLS Registry are as follows: First Bank & Trust, Brookings (includes Milbank, Stockholm, Toronto, Vermillion, and White in South Dakota and Pipestone, Cambridge, East Bethel, Edina, New Prague, Princeton, and Roseville in Minnesota) – 409296; First Bank & Trust, Sioux Falls (includes Canton, Garretson, Madison, and Watertown) – 196045.