Don't Take Advantage of Your Second Mortgage

Make no mistake-a second mortgage is a financial tool that can fix many problems. Need to finance a college education? You can tap the equity in your home for those tuition payments. Want to improve your property with a new kitchen? A 2nd mortgage gets you the cash you need. Looking to start your own business? Home equity loans can be the hero.

While it's a great tool, it does have some potential shortcomings. Counting on your home equity to double as a savings account can be a risky proposition. Here are two examples of why relying on a home equity fix can leave you broke.

1. Mortgage rate spikes can rob you blind

Let's assume that you're counting on using your home equity loan or a refinance mortgage to pay for your child's college education. Perhaps when you developed this plan, rates were low, and a home equity loan, coupled with a tax deduction, seemed like cheap, easy money. Fast forward to your child's college years. Your plan has gone awry, as high interest rates make borrowing very expensive. If this were to happen, that "cheap" money would suddenly be very expensive, making it difficult to meet your monthly payments.

2. The bubble bursts

Anyone who's suffered through the recent housing market stagnation knows the dangers of buying high and borrowing low. If you purchased a home when values were at the peak, the market may have cooled and cut into your home's equity. Suddenly, when it comes time to tap all the money that you had counted on, you find that your home doesn't appraise as highly as it once did. As a result, there's no equity to borrow against, and you're short on funds.

There's no doubt about it-home equity is a great financial tool. But as these two examples indicate, treating it as a savings account can be risky. If you're planning some significant future expenses, beef up your savings while you're building equity. There are simply too many market forces that could work against you if you don't.