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Second Mortgage Basics
If you're in need of additional funds and you own a home, you may have the opportunity to borrow against your home through a second mortgage.
A second mortgage is another name for a home equity loan. The amount that can be borrowed on a second mortgage is typically based on the difference between your home's current value and the outstanding principal balance on your first mortgage. This type of loan utilizes your home's equity to provide you funds for home repairs, school tuition, debt consolidation and other financial needs. For example, if you have a child who's about to go away to college and you need money for the tuition, a second mortgage can help you afford your child's education. If you want to make home repairs or renovate your home, a second mortgage can supply you the funds you need to get the job done. It's a good way to tap the asset value of your home to meet your investment and budget needs, and helps you avoid incurring high interest unsecured debt like credit cards.
Second Mortgage Benefits
There are some innate benefits to a second mortgage. First of all, since a second mortgage is based on your home's equity, as a home owner, you have the funds readily available. A second mortgage is a secured loan and is generally easier to obtain than other types of loans.
Also, the interest paid on a second mortgage is normally tax deductible. This is an enormous benefit that is not available on many other types of loans. With a second mortgage it is generally very easy to deduct the interest you pay on your second mortgage from your taxes.
Second Mortgage Disadvantages
There are some disadvantages associated with a second mortgage that you need to be aware of. For starters, since the second mortgage is being based on your home's equity, you are putting your home up as collateral. If you default on payments, the bank could take away your home in a foreclosure process. Also, interest rates can be higher than a first mortgage, especially if you have a low credit score. A low credit score always affects the interest rate of your loan and the amount that you can borrow.
How to Get a Second Mortgage
If you've determined that a second mortgage is the answer to your financial needs, you need to do a few things. You need to make certain that the reason why you're getting a second mortgage makes it worth borrowing against your home. For example, if the only reason you're getting a second mortgage is to purchase a new motorcycle, and you already have two, you need to think if the end result is worth taking out a second mortgage. You will also need to get your home appraised.
A home appraisal will establish the current market value of your home and be the value used to determine the details of your second mortgage. After the appraisal, you need to find a lender. Check with the lender who you used for your first mortgage to see if they're a good source for a second mortgage. Also let Bills.com look for the best deals available for second mortgage lenders and resources. You never know where you'll find the best rate on a second mortgage. And finally, after you've compared lenders and made the decision that a second mortgage is the best choice, pick your lender and keep up with your payments. Remember, since you're borrowing against your home with a second mortgage, you are putting your home on the line.
A second mortgage is a sensible solution to acquiring funds for school tuition, home repairs and renovations, and even vacations and cars. But before you run out and get a second mortgage, you need to weigh the benefits and disadvantages of a second mortgage, and determine if the reason for getting one is worth borrowing against your home.