Question from a reader:
Randy, you wrote in an article about investing: “I believe people shouldn’t take out a second mortgage on their home. Consequently, for me to invest in high-yield second mortgages would be an attempt to profit from others’ poor decisions. I would not feel right doing that.” Why do you think getting a second mortgage is a poor decision?
Answer from Randy Alcorn:
The most important words I said are “in most cases,” which is very different from saying “in all cases.” Here are what I see as reasons that often make it generally unwise to take on a second mortgage:
- A second mortgage is secured by your home. If you default, the lender can foreclose, even if you’re current on your first mortgage. You could lose your home if you don’t pay back a second mortgage.
- Taking out a second mortgage increases your debt. This will strain your budget if you lose your job, your wages decrease, or unexpected expenses arise.
- Interest rates can be higher than refinancing.
- Second mortgages come with appraisal fees, origination fees, title fees, and other costs, sometimes requiring thousands of dollars up front. Some costs may seem to be hidden costs, but are nonetheless very real.
- Second mortgages can put pressure on your budget since you have to make two monthly mortgage payments.
- Second mortgages can pose a particular threat to those in financial trouble as companies that lend second mortgages can foreclose on borrowers who fall seriously behind on payments.
- Many people who take out second mortgages do so because they are in trouble financially, and the better solution to their financial troubles may be getting different jobs, controlling their spending, and avoiding all credit card debt.
- Getting a second mortgage can give the illusion of relief so that people feel greater freedom to spend more than they should, which will result in increasingly serious financial problems.
- Often people end up using second mortgages to spend money on their wants, not on their needs. The fact that this money is now readily available to them will increase their temptation to spend the money on vacations, cars, or other depreciating assets. They are trading long-term home equity for short-term benefits.
Sometimes, of course, it does work out OK for certain kinds of people in certain kinds of circumstances. Hence, my statement of “in most cases.”
So someone can certainly say it has worked fine for them, and sometimes it does, but it doesn't change my conviction that “most of the time” it’s not a wise financial decision. Obviously, it’s up to people to decide what’s wise for them. But because I believe second mortgages are often not wise for others, I do not feel it’s right for investors to make money from their poor choices.