Getting A No Equity Second Mortgage Is Dangerous

Thinking about getting a second mortgage with no equity in your home? Think again! The perils of getting a 2nd mortgage with no equity are many, but the most significant is home property is never stable. A home can rise and fall with value and ninety percent of the time, you’ll have no direct influence on its value. While you can do much to the interior and exterior to raise the value, you cannot produce neighbors that take care of their home, local housing markets, local job markets or any number of factors which determine the value of your home. While it may seem like a good idea at the time, using a second mortgage with no equity to consolidate loans, of any type, is dangerous. It’s also dangerous to use a no equity 2nd mortgage for any home improvement, or for anything for that matter.

When you buy a home, if nothing changes in the way you live or the neighborhood (job market included), then within a year your home usually will raise in value. The amount your house is worth currently minus the amount you’ve paid for the home is your equity. Equity can be negative or positive in value. Some people get automatic negative equity because they get a 2nd mortgage packed in with the first. This type of no equity 2nd home mortgage is commonly 125% loan. Meaning you take out a mortgage for 125 percent of the home’s value. The extra 25% is the negative equity.

When considering a second mortgage, many people aren’t aware of the risks. Home prices can rise or fall. If you take a mortgage for 125% of the home, you start with negative equity. If your home drops in value, the negative equity increases. This means if you need to sell your house for any reason, the sale of the home won’t cover the mortgage and can result in a huge payment being due at the closing of the sale. Imagine being in a situation where you must sell your home due to finances or job relocation and owing a huge $50,000 payment. Consider all the problems when taking out a mortgage in the first place and you’ll realize a 25% extra loan can add an undue burden on you.

If you’re desperate for cash, using a 0% interest credit card, or getting a really low interest loan are better ways to go. In either case they are not dependent on the equity in your home and won’t put your home at risk.

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