Pros and Cons of a Second Mortgage

Buying a home is a great way to accumulate wealth. Many homeowners often tap into their equity by taking out a second mortgage. However, when it comes to taking out a second mortgage, the risks cannot be ignored.

Second mortgages have many advantages, but they have weighty disadvantages, too. Ignoring the potential risks can be dangerous.

A second mortgage refinance is similar to your first. It's a loan secured against your house, and the interest you pay is tax deductible. The main difference in a second mortgage occurs in the event you default on your loan. If you ever default on your loan, the lender who holds the primary mortgage is the first to receive any funds recovered from the defaulted loan. The second mortgage lender is next in line. Because second mortgages are a slightly riskier proposition for lenders, they're generally tagged with higher interest rates.

What are the advantages of a second mortgage? If you've built up equity in your home, a second mortgage allows you to tap large sums of money at one time. The money can be used for home improvements, paying for college, debt consolidation, and even paying for private mortgage insurance.

What are the disadvantages of a second mortgage? All the advantages of a second mortgage can turn into a huge disaster if you fail to make your mortgage payment. Your lender could foreclose on your home if you default on the loan and your primary mortgage.

Home Mortagage

A remortgage is essentially a switch from your current mortgage to another lender or the same lender who offers a better deal in terms of better interest rates and better repayment terms and conditions. You could also use a bad credit remortgage to release the dormant equity built on your home during the recent times. This freed up cash can be used to meet your financial requirements including home improvements, educational loans, holiday or even to consolidate your existing high interest debts into a single affordable and easy to manage monthly payment.

Remortgage is done to meet cash needs, to reduce costs of interest, to decrease the amount of monthly installments, to reduce the period of the loans , to meet expenses which are unforeseen and sudden. There may be times when a person has to get into problem remortgage. People who have had a bad credit history may find difficulty in getting a remortgage and problem remortgage is just the solution for them.

When you think of taking a remortgage loan with adverse credit then the first place where you can apply for these loans is with the lender with whom you have your present mortgage with. The lender can offer you a better deal and help you lower your payments. Besides this you can look for a lender that specializes in giving out adverse credit mortgage loans. They can help you out by giving you a loan at better interest rates and terms so that it becomes easy for you to pay off the loan.

The Fed and mortgage rates

Whether by design or by accident, the Fed now is trying to plug the hole in MBS demand left by the short-sighted and partisan-politics-driven takeover of Fannie and Freddie. The portfolios represented unacceptable systemic risk to the intellectual foes of FN/FRE and, to bank supporters, unfair funding advantage — and it follows, too sharp an edge before subprime & Alt-A in the loan market. But to all other sectors of mortgage demand they were market ballast, operating efficiently to keep a floor on pricing.

Critics of Fannie and Freddie will argue all kinds of things to the contrary, but Fannie and Freddie were very sophisticated asset/liability managers and value buyers, who bought MBS and loans for portfolio when they were cheap — in flight to quality panics and strong interest rate rallies. This established that floor on pricing which helped buffer performance for other investors and kept the mortgage rate from widening too sharply from other interest rates in a rally.

As you know, this mechanism collapsed starting last spring. They started having difficulty funding as cheaply, capital constraints on portfolios began to bother MBS investors — in brief, the foreign, hedge fund and other buyers who were next buyers on the margin after FN/FRE started to balk. Many have gone as FN/FRE clearly can not use their funding ability and portfolios as they had in the past. It finally dawned on the authors of every unintended consequence you never wanted to imagine that someone had to replace the demand for mortgages. Enter the Fed.

They are doing their best, through very skilled managers to realize value and buy up enough new production to keep mortgage rates close to Treasuries. I haven’t looked lately at how they are doing, but they have achieved new historic lows in mortgage rates to best buyers. But bear in mind, they can’t remove all the spread between mortgage rates and Treasury rates. Investors must be compensated for prepayment risk and all its siblings and cousins. Also, if Treasury rates rise with Treasury supply, then mortgage rates will rise.

If they have a number (ideal mortgage rate) in mind, I don’t know it. I don’t recall anyone saying out loud what the goal was since (former Treasury Secretary) Paulson left. It’s not the number that matters so much either, it’s the psychological effect of historic low and the pure facts of affordability. The objective is to get more disposable income into refinancing households — or at least, foreclosure protection — and to attract new buyers into the housing market. There are lots of frictions and hurdles on the way to that objective that the Fed cannot control.