Taking out a Second Mortgage

Taking out a second mortgage

One of the biggest benefits of owning your own home is the equity you create. By making payments toward your principal balance, you are building equity in the home – equity that can be used to leverage yourself into a vacation home, that RV you’ve always wanted, or even just to pay off credit cards and other bills. While there are benefits to taking out a second mortgage, there are also risks involved. Never go into something like this without exploring all your options and thoroughly reading the fine print.

Taking out a second mortgage is usually easier than getting the first. The reason? You now have equity built up in the home you are taking out the second mortgage on. Because you’re using the house for collateral, there is less risk for the bank and the second mortgage generally goes through much quicker and easier. Any secured loan will be easier to obtain that one that is unsecured – banks don’t like high-risk ventures and exactly that’s what many unsecured loans are. With a secured loan, you get your money quickly.

Another benefit of a second mortgage is that the interest you pay on it is usually tax deductible. Few loan types offer the ability to deduct the paid interest on your taxes come April 15th, but a second mortgage does. This is not the only reason you should think about when determining what loan type is best for you, but it does help.

As mentioned above, there are also drawbacks to taking out a second mortgage, probably the biggest of which is the fact that you are putting your house up as collateral. This can be risky if you’re not absolutely certain that you can pay back the loan. If you fail to pay it back, or even miss a payment or two, you may be forced to forfeit your home. Never put your house up for collateral if there’s even the slightest chance of repayment problems. It’s not worth losing your house over – there are other options available.

Another drawback to a second mortgage is the possibility of an interest rate that’s higher than normal. That interest rate goes even higher if you have a low credit rating. Be sure to calculate how much you’re actually going to be paying back with this interest rate compared to other loan types. It might be significant.

It seems like the benefits and the drawbacks of a second mortgage compliment each other well with positives and negatives. While it’s easier to obtain the loan using your home to secure it, you could very well lose that home if you’re delinquent with payments. And while you can deduct the interest at tax time, that interest may be considerably higher than what’s offered for other types of loans. It’s a case of “six of one, half a dozen of the other”.

As with any financial decision, don’t go in blindly. There are more than just a few issues to think about when deciding on a second mortgage. Talk to your lender and do more research before making a firm decision. It could save you a lot of time, trouble and money in the end.

Jim Miller is a full time full service licensed Realtor® in the Southern New Hampshire area with Bean Group and has many years of experience buying and selling New Hampshire Real Estate .

Contact Jim direct at 603-801-3987.

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