Factors When Choosing Between Second Mortgages vs. Equity Sharing Agreements
Considerations Regarding Getting a Second Mortgage vs. Equity Sharing Agreement
When it comes to tapped-out homeowners looking for ways to finance home improvements, there are two popular choices: getting a second mortgage or entering into an equity sharing agreement. Which is the better option depends on each homeowner’s unique circumstances.
Before taking on more debt, homeowners should first explore other financing options, such as borrowing from family or refinancing their primary mortgage. If those aren’t viable options, then it’s time to compare a second mortgage and an equity sharing agreement.
What’s the Difference Between a Second Mortgage and an Equity Sharing Agreement?
A second mortgage is a loan secured by the equity in your home, just like your first mortgage. The main difference is that a second mortgage has a higher interest rate because the lender views it as a higher-risk loan.
With an equity sharing agreement, you sell a portion of your home’s equity to an investor in exchange for cash. The investor becomes a co-owner of your home and is entitled to a percentage of the future sales price when you sell the property.
Benefits of a Second Mortgage
The biggest benefit of a second mortgage is that you don’t have to give up any ownership stake in your home. You also don’t have to make any monthly payments to the lender, since the loan is paid back when you sell the property.
Another benefit of a second mortgage is that the interest payments may be tax-deductible. Check with a tax advisor to see if you qualify.
Drawbacks of a Second Mortgage
The biggest drawback of a second mortgage is that you’re taking on more debt. This can be a risky proposition, especially if you have trouble making your monthly mortgage payments.
Another drawback is that second mortgages often come with prepayment penalties. This means that if you sell your home before the loan is paid off, you’ll have to pay a penalty fee.
Benefits of an Equity Sharing Agreement
One of the biggest benefits of an equity sharing agreement is that you can get the cash you need without taking on more debt. This can be a good option for homeowners who are uncomfortable with the idea of taking on more debt.
Another benefit is that you don’t have to make any monthly payments to the equity partner. The equity partner is only entitled to a percentage of the sales price when you eventually sell the property.
Drawbacks of an Equity Sharing Agreement
The biggest drawback of an equity sharing agreement is that you’re giving up a portion of your home’s future value. This can be a risk if you plan on selling your home in the near future.
Another drawback is that you’ll have to get along with your equity partner. This can be difficult if you have different ideas about how the property should be managed.
Which Option is Right for You?
The best way to decide if a second mortgage or equity sharing agreement is right for you is to speak with a financial advisor. They can help you understand the pros and cons of each option and make the best decision for your unique circumstances.
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