What is a Second Mortgage?

Second mortgages are known by a couple of different names. They are referred to as home equity loans and they are also referred to as debt consolidation loans. Like a first mortgage, a second mortgage is a loan product that is secured by your home. However, a second mortgage generally charges interest rates that are several points higher than a first mortgage.

Top Three Reasons to Take Out a Second Mortgage

The most common reason why people take out a second mortgage is to pay off credit card debt. There are many advantages of using a second mortgage for paying off credit card debt. First, the interest rate charged by a second mortgage is usually a lot lower than what credit cards charge. Secondly the interest charged by a second mortgage is usually tax deductible.
 
The second most common reason why people take out a second mortgage is to pay for home improvements and repairs. This is a great option for adding on a room, fixing the roof, or fixing up the house in order to sell it for a higher asking price. One of the best advantages of using a second mortgage for home repair and improvements is that you are adding value to your home and improving your net worth.
 
The third most common reason why people take out a second mortgage is to pay for their kids' college education. Again the second mortgage is a great way to cash out the equity that you have earned in your home in order to invest in your kids' future. This particular activity may have two tax advantages. First of all you can deduct the interest charged by the second mortgage, and secondly you may be able to deduct the money you used on educational expenses.

Warnings About Second Mortgages

While a second mortgage has a lot of great features, if you do not monitor your spending after taking out this loan, you can easily slip into bad spending habits. For example if you use the proceeds from your second mortgage to pay off your credit cards you may be enticed to run up your credit card balances again. This may over-extend your financial capabilities and you may be in a difficult financial situation once again. Also, if you are not able to meet the additional mortgage requirements imposed by your second mortgage and you fall behind in your payments you can end up losing your home. 

Conclusion

If you want to take advantage of the financial benefits offered by a second mortgage without falling victim to some of its drawbacks you need to take control of your finances. Before you apply for a second mortgage make sure that you will be able to afford the payments. As you utilize the funds from your second mortgage take steps to ensure that the money is being used appropriately. If you will be using the money to pay off credit card debt then you will want to take steps to eliminate the threat that you will run up a large credit card balance again. Finally, you will want to make sure that you pay your second mortgage on time and in full each month. These steps will ensure that your second mortgage improves your financial position instead of weakening it.