Reasons Not to Fund Major Home Repairs With a Second Mortgage

A second mortgage should not fund major home repairs because it can 1) increases overall debt to income ratio, 2) lower credit rating through increased debt 3) increase monthly budget costs due to interest on the second mortgage, 4) potentially reset a mortgage amortization schedule so less money is paid into principle every month and 5) may not pay off in an increase in equity value of the home.

In a sense second mortgages can be compared to credit cards with large credit limit and a lower interest rate; the larger the amount of the loan, the higher the total interest owed will be. If a household cannot afford home repairs using existing finances, and is already heavily in debt then the home repairs could be a risky gamble. To illustrate how a second mortgage can be an overextension of debt and a financial risk in addition to the above points are the following three points.

• Financial burdens too high for the borrower may be facilitated by the second mortgage.

• The sales price to mortgage risk ratio may be too low. (www.mrgprofessor.com)

• Bankruptcy may be just around the corner in the event of income interruption.

Alternatives to a second mortgage

While home repairs may be a necessity rather than a profit driven action, a second mortgage may seem like the only option. This is not the case. Second mortgages are an implicit indication of living beyond one's means. If home repairs are too expensive, mortgage holders may be wise to consider the following options. These alternative options can save money on interest accumulated and owed through the second mortgage and lower one'soveralldebt if the alternative involves upfront or short term payment.

• Financing a repair with a contractor.

• Save money for the repair.

• Sell the home as is and buy a smaller home in better condition at the same rates and monthly costs.

• Cut costs to finance the repair.

• Obtain an additional source of income.

• Ask for a tax deductible gift from a benefactor.

• Shop around for a low cost but licensed and fully insured contractor.

The opportunity cost of second mortgages

There is yet another group of people who may still not be convinced second mortgages are a bad idea. People who are banking on their own revenue stream and the benefits of the mortgage may think the second mortgage is a worthwhile risk. It is not worthwhile because of the opportunity cost. Money invested in a home repair is money not invested in 5% certificate of deposit or retirement savings plan.

The opportunity cost of investing in a home repair outweighs the benefit of the home repair itself.

For example, a $20, 0000 second mortgage at 6% annualized interest costs $1,200.00 per year to finance. The same $20, 000.00 in an IRA earning 9% earns $1,800.00 per year and if it is in a CD at 6% $1,200/year. In 5 years the CD would yield $6,000 or closer to a third of the face value of the mortgage and or home repair cost. In other words, if the home repair isn't essential the money is better spent elsewhere.

That's not all, many home repairs can be temporarily fixed with a less expensive measure. For example, major roof repairs can be patched, and foundation cracks can be sealed, While this is not a solution to the problem, it can buy time to save enough money and/or cut costs long enough to finance the repair. For repairs that are absolutely essential and must be completed, 2nd mortgages are not the only sources of financing. Other sources include the following:

• Home Equity Line of Credit.

• Loans against Insurance policies and IRA's.

• Automobile financed loans.

In other words there are more options that may not be as risky as loans against life insurance and IRA's are secured and losing an automobile is better than losing a house in the unfortunate scenario of the loan falling through. What's more home equity lines of credit do not require all the money be used. A home equity line of credit could be used to finance the home repair over time.

In sum, second mortgages can be risky and are not always even a profitable decision. When it comes to home repair, home repairs can be dealt with in many ways and one should not always think a second mortgage is the best and only way to finance a home repair. The above article elaborates on these reasons and illustrates other sources of financing and problem solving while stating and illustrating reasons why major home repairs should not be funded by second mortgages.

Source: http://tinyurl.com/6a9tchn ('The Mortgage Professor')