Second mortgages are loans drawn out based on the equity of your home in addition to your primary mortgage. There are two types of second mortgages - a home equity line of credit and a fixed-rate home equity loan. The first type, a home equity line of credit or HELOC, is basically like a credit card that lets you draw money out when you need it and it usually has a low interest rate while also giving you tax benefits. The second type, a home equity loan, is a lump sum loan with a fixed interest rate and a set payment schedule. With any type of loan, it is important that you make your payments on time so you don't default. Once you have a second mortgage and you go into default, your credit may not be the only thing affected. It could also cost you your home.
There are plenty of positives when taking out a second loan. Mainly, you have cash when you need it for whatever you may need it for. If you plan on doing home repairs and upgrades or if you are planning that once in a lifetime vacation you always wanted, this can be quite handy. Most lending offices will generally give you a low interest rate on your second loan depending on your credit history and the interest rate climates. Your payments can be offset by the fact that the interest on your mortgage may be tax deductable and because most homes appreciate in value, the equity will be replaced automatically.
The same pro can also be the same con. When many people get a second home mortgage, they are thinking about what needs to be fixed or whose college tuition it's going to cover. However, you may be borrowing too much. This can hurt you if interest rates go up or you need to move. If you need to move and interest rates go up and the real estate market is not as strong, your home could be worth less than what it used to be and you could end up owing more that you started off with. And if you got a HELOC and interest rates go up, your HELOC interest payments will go up as well, possibly putting you in quite a bind.
Getting a second mortgage may seem like money falling from a tree that can help you in a time of need. But always make sure you leave room for emergencies, such as a fluctuating market or interest rates shooting sky high. Never borrow more that you can afford to pay back. Instead, only take what you need and you will find that second mortgages can be a great help when you need it.
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