Taking A Look At Second Mortgages
If you own a home and need a large sum of money to pay for an important project, then the equity in your home can be put to good use by obtaining a second mortgage.
Second mortgages are secured loans that are taken after the first, or primary, mortgage. The amount of funds available to you can be determined by subtracting the remaining amount of your primary loan from the current market value of your home. This is called the equity remaining, and it is the figure used to determine the amount available to you with a second mortgage.
Loan Amounts
Unless you have at least 20% equity remaining in your home, it may be difficult to find a lender willing to make you a loan. Second mortgages work best if your home equity stands at 20% or higher. You can use an on-line mortgage calculator to help you determine the total amount that you may be able to borrow.
Advantages
Second mortgages can serve many different purposes. You might need to use the money for:
- Home improvements
- Major car or equipment purchase
- College tuition
- Startup capital for a new business
- Medical bills
- Consolidation of credit card debt
The interest on a home equity mortgage is usually tax deductible, check with your tax adviser.
Disadvantages
Second mortgages have disadvantages which must be weighed very carefully before reaching a decision:
- Interest rates are usually higher
- Defaulting on payments can lead to foreclosure
- Closing costs and related fees can be expensive
Features To Watch Out For
When shopping around for a second mortgage, be sure to look out for:
- Securing the lowest APR (annualized interest rate) you can find
- Avoiding default penalties – a missed payment could cause your interest rate to skyrocket
- Penalties for paying off the loan early (prepayment penalties)
- Lump-sum (balloon) payments at the end of the loan term