What You Should Know About Your Second Mortgage

If you are in need of a great amount of money, the best possible source to get some is through your home through a second mortgage.  

Lenders usually prefer to lend with your home on the line because real estate is a guaranteed way to retrieve the loaned amount in case of default. Before you take the plunge though, you might want to take a good look at your 2nd mortgage first.

Home Equity Loan vs. HELOC

Home owners can take advantage of two kinds of loans after the first mortgage. The home equity loan is what is traditionally known as the second mortgage. In this type, you can borrow a lump sum that has to be paid over a fixed period with fixed rates. Your 2nd mortgage is subordinate to your first mortgage in the event of default or non-payment of debts. Closing costs for a second mortgage are lower compared to a first mortgage but the interest is higher due to its subordinated condition.

A HELOC has a variable interest rate and functions like a credit line. You can continue to borrow for a span of time until your funds run out in which case you are required to pay off the loan. Some homeowners prefer a home equity loan or a second mortgage over a HELOC because the stability of a second mortgage will allow for better financial management and budgeting.

Advantages

Homeowners may take a second mortgage for a variety of reasons. A second mortgage may be used to finance a new car, pay for a child’s college education or just about anything else. Homeowners may like the idea of a second mortgage because of the tax savings. Interest for a 2nd mortgage is tax deductible which makes debt consolidation a good option.

Consolidation

Aside from using a second mortgage for other expenses, it can also be used to help pay off other debts with high interests like credit card loans. If you have several loans, it makes sense to organize them through consolidation for one time monthly payments. Consolidating your debts into a second mortgage however may be disastrous for you if you get carried away with the illusion of paying less and start building up your credit card debts again. You could unknowingly sink further into debt and lose your home.

Disadvantages

As briefly mentioned, the two biggest disadvantages of a second mortgage are its higher interest rates and the greater financial risk involved. If you cannot control your spending habits, you may eventually be unable to pay for your consolidated loans. You will lose your home. A 2nd mortgage therefore should only be taken if the personal advantages to you far outweigh the risk of losing your property.

Subordination Policy

The very nature of a home equity loan makes it theoretically subordinate to a first mortgage. You must take note however, that some lenders may categorically refuse subordination. It may be too much for non- technical people to understand the legality of categorical refusals. It is important however to ask first about such policies before jumping in for a second loan.