Sometimes there are situations in life where you want to increase your cash flow. These can include an emergency, a desire to continue your education or renovate your home, or make a big purchase such as more real estate or a vehicle. Loans or lines of credits are popular options but sometimes the interest rates on these are not favourable or lenders may not be able to provide the amount that you need.
As a result, some homeowners choose instead to take out a second mortgage on their homes. This consist of borrowing against the equity of your home, providing you with the funds that you need to achieve your goals. Below are reasons to consider taking out a second mortgage on your home.
1. Pay down higher interest debt
If you are like a majority of other homeowners, you probably have lines of credit and credit cards in addition to your mortgage. These debt payments can add up significantly and higher interest rates on these debts means more of your monthly payments are going towards the interest instead of the principal amounts.
Taking out a second mortgage allows you to either consolidate your debt under one account and pay one payment and interest rate or use the money to pay down higher interest debt. While a second mortgage will have a higher interest rate than your first one, it will still be lower than interest rates on some lines of credit and credit cards that can go as high as 29 percent.
2. Larger amounts
While you are quite content with what you have, there may come a time in the future where you want to make a large purchase as an investment. Examples of these situations include renovating your house, pursuing higher education, or purchasing additional real estate. However, because such things require a lot of money, you may not be able to acquire the funds needed through traditional loans and lines of credit.
A second mortgage gives you access to more funds because you are using your house as collateral. In doing so, you are able to borrow up to 80 percent of your home’s value. As a result, you will definitely be able to achieve your goals.
3. Good in emergencies
Although no one likes to think about them, accidents can arise at any time. While it is easy to think that you will prepared for anything that comes your way, sometimes you are not and need access to a significant amount of cash and fast.
A second mortgage in a time of an emergency is beneficial because it is guaranteed to be there for you. The funds can be given in a form of a line of credit, allowing you to use a credit card or cheque connected to your account. This will allow you to address the emergency in as little time as possible. A second mortgage is also helpful because if you are struggling with finances at a given time, you will be able to make interest-only payments until you are stable again.
4. Tax benefits
Tax season can be fantastic when you are expecting and receiving a significant return however it can be the bane of people’s existence when money is owed. Therefore, you need to do whatever you can to put yourself in a good position to get a return or at least break even when your taxes are due.
The interest payments you make on a second mortgage are tax deductible up to $1 million in mortgage debt. While this will not guarantee you a refund, it will reduce your chances of having to pay any additional taxes to the government.