Owning a rental property can serve as a great source of alternative funding. You can sell, do a cash-out refinance or take out a second mortgage.
A second mortgage is an excellent tool for experienced investors who need to access cash for investments or business purposes. There are plenty of valid reasons to take out a second mortgage. You may already have such a low rate on your primary mortgage and a new cash-out refi doesn’t make sense, you are investing into another property or investment that will offset the cost of the mortgage or, you are using the second mortgage to add value to the property such as the addition of square footage or repairs.
There are also many reasons to avoid getting a second mortgage on an investment property. Here are 3 compelling reasons to avoid getting a second mortgage for rental property.
Reason 1 – Interest Rates on Home Loans for Investment Property Are At An All-Time Low
Before you jump into a second mortgage do some numbers on your current loan. Do you have a high rate now? Would you benefit from refinancing your entire loan balance and adding the funds you need in a cash-out refinance? If so, it may make more sense for you to just refi the whole loan.
Interest rates on second mortgages are generally higher than primary mortgage loans and it makes more sense to just do one loan if you are dropping your interest rate. With rates at an all-time low, this may be the case for a large number of landlords out there and you should definitely be looking into this.
Reason 2 – The Best Loan For A Rental Property Is Having No Loan On A Rental Property
Most real estate investors buy property to hold long term and rent out. This allows you to make use of the rental income to pay down and eventually pay off your mortgage balance. If you buy an investment home today and your mortgage payment is $1,000 per month on a 30-year loan. Then you rent the property for $1,200 for that entire 30 year period, using the extra $200 for repairs, maintenance, and emergencies. You will eventually pay off that investment property. The great fact about it is that you would have paid that property using someone else’s money.
Any cash-out refinances or second mortgages will act as a speed bump to the payment of that loan balance. Every time you grow your loan balance you will delay the payoff by whatever new loan terms you agree to on the transaction. Inevitably, delaying the goal of most landlords which is to own the investment property outright so that all the rent will be considered income.
Reason 3 – Exposure to Risk
One of the major drawbacks to obtaining a second mortgage on your investment property is your increased exposure to risk.
A second mortgage increases your monthly bills, usually carries a higher interest rate and the lender will use your investment property as collateral. If you aren’t able to pay? The lender is able to foreclose on your investment property rather quickly. Foreclosure protection laws generally only cover protection for primary residence property. Considering the added risk, you will want to be certain that you are able to take on the added financial burden of paying another monthly payment before accepting a loan on your investment property.
Overall, a second mortgage can be advantageous for certain needs. Emergencies, investments and the choking points of life’s finances will always assure that second mortgages never go out of style and the need for quick financing will always be a staple of our economy. However, most investors believe that there are many options available for financing that will allow you to avoid obtaining Junior liens onto your rental property portfolio.
Get The Best Investment Property Loan For Your Portfolio
If you are considering leveraging one of your investment properties with a second mortgage then you owe it to yourself to check into the possibility of just doing a cash-out refinance. Rates today are so low that you may be surprised to find that a cash-out refi on your entire balance may save you more money.
We have over 30 years of combined experience in helping investors finance and invest in real estate property. Give us a call and we will be happy to look at your scenario to help you decide which loan program is best for your portfolio. Call Today!