Benefits and Risks of Second Mortgages

Second mortgages are loans against the equity of people's homes. A second mortgage is in addition to the primary loan that is on your property. The loan can be used for anything ranging from home improvements to debt payoff to a vacation. There are two types of second mortgages available to homeowners: a home equity line of credit and a fixed-rate home equity loan. The home equity line of credit (HELOC) works as an open line of credit available to you. You are able to use the funds as you need them. The fixed-rate home equity loan allows you to withdraw only a lump sump. The loan has a set interest rate and repayment schedule. Second mortgages work when you need money immediately.

Benefits

There are several benefits to assuming a second mortgage. First, you have funds available to tap into with reasonable interest. Since your home gains equity, you are able to use equity as means to get cash. The interest rates are low, and the equity used can be replenished over time as the property appreciates. Second, getting a second mortgage is easier than applying for a different type of loan. It most cases, the process is as simple as having your home appraised and finding a lender with the best interest rates. Third, interest paid on the second mortgage is tax-deductible. Fourth, the interest rates are lower than those of credit cards. Credit cards tend to have higher interest rates, and you are assessed interest on balances not paid in full.

Risks

As with all financial transactions, there is a level of risk associated with second mortgages. The biggest risk associated with second mortgages is that you are using your home as a means to get cash. If you default on your payments, you put your home at risk for being foreclosed upon. The second risk is an interest rate increase. If you are using a HELOC, an increase in the interest rate will cause your payments to increase and could make them unaffordable. The third risk is taking more than you need. If you take more than you need and the market turns or the interest rate increases, you create a situation in which you might default.

Considerations

Before taking out a second mortgage on your home, look at the current housing market and make sure that it is the best option for your circumstance. If you have determined that a second mortgage is the best option, budget and take out only the amount you will need. Talk to your lender beforehand to determine what your repayment terms will be and if the payments will be feasible for you to make. You have the option to shop around. Remember that you want to be able to handle your circumstance as well as keep your home. Take time to research before making a final decision.

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