Second mortgage loans are loans that let you borrow against the value of your home. Your home is an asset and, over time, this asset can gain value. Second mortgages, also known as equity credit lines and provide a way to put this asset in relation to other projects and objectives.
What are second mortgage loans?
A second mortgage is a loan that uses your home as collateral – similar to a loan you may have used to buy your home. The loan is known as a “second” mortgage because your purchase loan is usually the first loan secured by collateral in your home. Second mortgages use equity in your home, which you may have accrued with monthly payments or through increases in market value.
The different types ofsecond mortgage loans
The loans can come in several different forms.
Fixed sum: a second default mortgage is a single loan provides a fixed amount of money that you can use for whatever you want. With this type of loan, you will repay the loan gradually over time, often with fixed monthly payments. With each payment, you pay a portion of the interest costs and a portion of the balance of your loan (this process is called amortization).
Line of credit: It is also possible to borrow using a line of credit or a set of money that you can take out. With this type of loan, you never need to have any money – but you have the option to do so if you wish. You’ll get a maximum loan limit and you’ll be able to continue lending (multiple times) until you reach this ceiling.
Advantages of second mortgages
Loan Amount: Second mortgages allow you to borrow a large amount. Because the loan is secured against your home (which is usually worth a lot of money), you have access to more than you could get without using your home as collateral. How much can you borrow? It depends on your lender, but you can expect to borrow (counting all your loans – first and second mortgages) up to 80% of the value of your home.
Interest rates: second mortgage loans usually have lower interest rates than other types of debt. Again, securing the loan with your home helps you because this reduces the risk to your lender. Unlike unsecured personal loans like credit cards, second mortgage interest rates are commonly in a single digit.
Tax Benefits: In some cases, you will get a deduction of interest paid on a second mortgage. There are numerous technicalities to know, so ask your tax preparer before you start making the deductions. For more information, learn more about mortgage interest deduction.
Disadvantages of second mortgages
Of course, life is full of compensations, even when it comes to second mortgage loans. Be aware of the pitfalls of using a second mortgage. Costs and risks mean that these loans should be used wisely and not the only option available.