A second mortgage is a home equity loan or home equity line of credit (HELOC) that utilized the borrower’s home as collateral. It is known as ‘second mortgage’ because the borrower’s first mortgage, the loan acquired to buy the property, is also secured by a lien on the house. In simple words, you will have two mortgages on your home.

Why Get a Second Mortgage?

As a second mortgage permits a homeowner to borrow against her or his own home equity, most homeowners normally prefer to get second mortgages to pay for huge expenses. They clean big expenses like:

• Home improvements
• Medical bills
• College education for kids
• Consolidation of higher-interest debt, such as credit cards

Few borrowers also employ second mortgages to purchase investment properties. It can be slightly risky since a downturn in the housing industry may influence the value of both properties in a negative way. Beholding a second mortgage to purchase a car or to pay for a holiday trip or other luxuries isn’t really advisable. As your home is on the line, so any expenses that will not add to the value of your house or the earning ability of your household should not be done.

Types of Second Mortgages

Home Equity Loans: This type of second mortgage loan is a one-time lump sum that is repaid at a fixed interest rate. Mostly, such loans are 15-30 year loans and are just like a conventional purchase mortgage.

HELOC: This type is quite similar to credit cards. It carries a variable interest rate and as the borrower repays the principal, the credit line rotates and can be utilized again. It draws period, during which the borrower withdraws the money and pays only interest every month. HELOC also has a repayment period in which the borrower pays both interest and principal.

Benefits of a Second Mortgage

• As a second mortgage is a way to borrow a noteworthy amount of money, know how much equity can be tapped on your debt level, income, credit record and other aspects.
• This type of mortgage has lower interest rates than rates on credit cards or personal loans.
• If you utilize this mortgage “to buy, build or substantially improve the taxpayer’s home that secures the loan,” then the interest is surely tax-deductible.