Do You Need to Take A Second Mortgage?


The answer: Only if you absolutely need to and you know you can cope with the payments now and in the future. A second mortgage, literally, is another loan made against your home, to add to an already established first mortgage. People usually take on a second mortgage for renovations to improve their homes value, to pay for their kids tuition, pay off existing debts or just to be able to experience the finer things in life.

Second mortgages typically run for about 15 years and are considered to be more risky. This is because of the fact that it the borrower is forced to foreclose or sell his home, the second mortgage will not be compensated until the first mortgage is fully paid. Hence, lenders charge a higher interest rate on second mortgages than with firsts.

There are two kinds of second mortgages: the home equity loan and the line of credit second mortgage.

Under the home equity loan, the borrower may get the loaned amount at one time and just pay monthly. This type of second mortgage has a fixed interest rate and is normally used to finance almost anything the borrower can think of.

On the other hand, the line of credit second mortgage is its opposite. With this scheme, the borrower may opt to get the money all at one time or spread his or her credit over a number of years and as needed. For instance, if you get a $40,000 line of credit second mortgage, you can get the full amount immediately, or opt to get $20,000 first for a new vehicle, then $5,000 after a few years for some home improvements, and so on, just as long you still have credit available.

Sounds good? Heres the tricky part: the interest rate is not fixed under the line of credit plan. Hence, the amount you pay every month varies, because rates change periodically. Your monthly interest rate comes with an agreed prime rate. So, therefore, if the prime rate stated on your loan deal is 4% and the interest rate for a particular month is 6%, then you will have to pay a 10% interest rate just for that month. For the next month, the interest rate could increase to 6.5% or drop to 5%.

This seems a little complicated, yes. But if you think you can look beyond the variations in favor of stored money you can use for future emergencies and needs, then this kind of second mortgage could be for you. Otherwise, just stick to the traditional home equity loan.

Once youve gotten the money you need, the next thing to do is stay responsible and prudent. If you use it properly, you will be able to enjoy the luxuries youve always wanted to have. Go build that new rec room in your basement if you want, or treat yourself to that Caribbean Cruise everyones been talking about. The possibilities are endless (as long as its under your loaned amount, of course). Just dont go overboard. If you dont handle your finances well and fail to meet your monthly obligations, you could end up debt-laden or, worse, homeless.