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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