Don't be Clueless About Second Mortgages

You don't need to be a private eye to find the best second mortgage. Lenders leave you plenty of clues about their products. Take a good look at them, and learn how second mortgages work before you make any decisions.

If Sherlock Homes were sniffing around for a second mortgage, he'd probably find the entire process elementary. With so many lenders on the market, and so many government regulations dictating what they can and can't do, he'd find plenty of clues to help him make the right decision on a good second mortgage. You can, too. Start by taking a close look at the following topics:

Second mortgage education

Types of second mortgages: It won't take much investigation to find that there are two types of second mortgages. The first is a home equity loan, which offers a fixed-interest rate over a fixed-term. The second is a home equity line of credit (HELOC), which works like a credit card. It offers a variable interest rate that's charged only on the amount of equity you tap. The interest on both loans is generally tax-deductible.

Prepayment penalties and other fees: Mortgage lenders are required to give you a Good Faith Estimate with every loan. This is a complete listing of all the loan's costs, including fees. The more cutthroat lenders try to pad their fees, or tack on a prepayment penalty, which penalizes you if you refinance the loan within a certain period of time. Be sure that you scrutinize the Good Faith Estimate, and perhaps even show it to a trusted financial advisor.

Annual Percentage Rate (APR): The APR provides borrowers with an apples-to-apples comparison of second mortgages. To calculate the APR, a lender factors in a loan's closing costs with the mortgage loan rate that's advertised. It's a good idea to use APRs as you do your shopping, but take them all with a grain of salt. Many lenders calculate their interest rates in different ways, making a true, apples-to-apples comparison somewhat difficult. If you use APRs, be sure to find out exactly how that lender calculates the rate.

Insurance policy: A favorite scam by unscrupulous lenders involves tacking insurance policies onto your loan. A lender may offer you insurance, which would cover your loan's costs in the event of disability or loss of life. In all fairness, you may want to consider a policy if you currently have little or no insurance. However, approach them with extreme caution. Many of the policies are overpriced and won't help you meet your true insurance needs. Be sure to shop around before you accept this type of deal.

Sherlock Holmes would consider the process of taking out a second mortgage relatively easy when compared to tangling with the likes of Professor Moriarty. You'll find the process is simple too, provided that you do your homework and are not clueless about second mortgages. As Sherlock might say, "It's elementary, my dear homeowner."