What Are The Advantages Of Having A Second Mortgage?

What are the advantages of having a second mortgage? A second mortgage can be taken out on a home to secure home loan security. It is something that a borrower should talk about with their tax advisor.

"A second mortgage is a lien in second position, meaning there is already one home loan - security against the residence - and now there is going to be another home loan security against the residence," explains Doug Perry, who has worked in the Consumer Markets Division for Countrywide Home Loans for 16 years. "Home loans are paid off in the order in which they are recorded and the second mortgage, because it is in the second lien position and was recorded after the first lien is paid second."

"Borrowers typically get a second mortgage when it does not make sense to get another first mortgage," Perry continues. "It could be perhaps in lieu of financing an automobile purchase. They want to take advantage of some of the of the tax ramifications."

Borrowers often use a second mortgage because of the low interest rates to pay off credit cards or other debts, which have a much higher interest rate. The second mortgage can provide lower payments than the credit card or other payments. The interest from a second mortgage is tax deductible, and credit card interest is not. If you owe enough interest on a credit card and only make the minimum payment, it may take you 30 years to pay your credit card off. A second mortgage may indeed be a good deal for some people as a result.

There are other reasons to take out a second mortgage, such as making home improvements or for a business loan. A borrower is usually trying to tap into the equity on his house.

The advantages for a second mortgage may be for you, if you can discipline yourself financially, not only as you pay off the second mortgage, but also afterward. There are disadvantages. Some people who do not discipline themselves find that after they pay off their credit cards once, their cards are maxed out a second time in a year or less.

If you are considering obtaining a second mortgage, it would be good to talk with someone you trust for tax advice.

"A borrower should check with his individual tax advisor relative to financing, that would be a home equity line of credit," explains Perry. "Maybe it is only $20,000, and it does not make sense to refinance their entire first mortgage to borrow that $20,000. They get a second mortgage home equity line of credit to do that. The home equity line of credit would be in second position in the scenario I described."

You might wonder the kind of credit you need to obtain a second mortgage. If you have perfect credit, it might be possible to borrow up to 125% of your equity. The worse your credit is, the higher interest you will pay, and the less you will be able to borrow against your equity. As an example, if you have less than perfect credit, you might be able to borrow only up to 80% of your Loan-to-Value. If you have a $200,000 house, and you owe $125,000, you might only be able to get a loan for $35,000. You might pay an interest of 11% on your $35,000, if you have less than perfect credit.

Two of the types of second mortgages are a home equity line of credit and a fixed rate mortgage. With a fixed rate mortgage, you would pay a fixed interest rate and have a fixed amount of time to repay the loan. The typical length of time for a second mortgage is 15 to 30 years. The interest on a home equity line of credit is often adjustable. The interest will be fixed for a period of time and then be adjustable for the remainder of the loan. You will have a maximum credit limit, like with a credit card, and you can take out any amount of money up to your maximum amount during the life of your loan. The difference when compared to a credit card is that you will have a fixed amount of time to borrow any money and repay it.

There are definite advantages in obtaining a second mortgage, for some people, but not for others. It might pay to talk with an expert to determine if a second mortgage is for you.

© High Speed Ventures 2011