Should I Take a Second Mortgage?
Taking a second mortgage on your home has nuances that you must
understand so that you can both protect your investment and make the best
of it. The first of course is to decide carefully whether a second mortgage
is really required or you are taking one out just because it represents
a source of funds. It may often be prudent to walk away from money that
is easily available, but of course, there may well be situations where
such a loan may be fully justified.
There are a number of occasions when a second mortgage is justified. Very
often, you may use this to consolidate your high interest debt into a
lower rate mortgage. Besides, this can also give you funds in lump sum
to meet pressing requirements such as college fees or medical bills.
To qualify for a second mortgage, your credit rating must be good and
you should be able to prove your income. While there are secondary market
mortgage providers, who specialize in handling cases of people with bad
credit etc, my advice is to go for a regular second mortgage unless your
circumstances are very pressing.
The second mortgage security is the remaining equity in your home after
you have taken out your first mortgage. You may want to take care that
the total quantity of outstanding loan does not cross about 90% of the
value of your home. This is because in the event of defaulting on your
second mortgage may result in a foreclosure, under these circumstances,
the proceeds from the sale of your house should not exceed the debt and
any other relevant fees and charges.
There are two main types of second mortgages – these are home equity loans
and home equity line of credit (HELOC). In the first instance, the lender
will give you a lump sum of money. Payback will start immediately and
will continue till the amount is paid off. In the second, the lender gives
you a line of credit similar to that in a credit card. You get a period
of time – 5, 10 or even 20 years during which you can withdraw cash as
required up to the limit of the amount approved. Once this period ends,
your payback starts.
What about tax deductions? Payments made to clear a second mortgage are
tax deductible. This though may change in the future. However, you may
want to perform some calculations to work out the exact benefit to you
because the benefit may well work out to be rather small.
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