Second Mortgage Loans for Home Improvements

Many people need to make home improvements, but don't have the large lump sum of cash available at their fingertips. Because of fluctuating market cycles, selling off stock may not be a wise strategy. Not only will you pay commissions and capital gains taxes on your stock investment proceeds and profits, you might critically impact your retirement savings. Credit card borrowing doesn't usually offer enough cash for home improvements. Even if it did, the terms and rates for credit card loans are exorbitant and risky. What's a homeowner to do? A second mortgage home loan might be just what the financial advisor ordered. It can be a prudent choice, with some tantalizing tax benefits to boot.

Probing the Process for the Second Mortgage

With any mortgage-first or second-the process is essentially the same. You'll be asked to document your income and credit history, and then pay closing costs for things such as appraisals, attorney's fees, and loan origination fees. Because second mortgages are more carefully scrutinized than first mortgages, (to ensure that you have the ability to pay them both back), you can expect to pay slightly higher interest rates and fees; but many of those costs are also tax deductible.

Determine how much money you need to accomplish your home improvement needs by getting written estimates from two or three reputable construction contractors. Add 10-20 percent for unexpected overages, because construction projects often run over budget. Then, approach your lender with your plan, and find out what kind of terms you can get for a second mortgage. Shop around and compare rates; but don't be surprised if the company that gave you a first mortgage offers the best deal. They have a working relationship with you already and are more familiar with your payment habits and financial situation. To them, you represent a good repeat customer instead of a first-time risk.

The great thing about borrowing a significant sum of money through a second mortgage is that you can repay it a little at a time, with a fixed payment schedule, over several years. Other loans require faster payoffs, have fluctuating and volatile interest rates, and don't come with any noteworthy tax benefits. And, as you add value to your home, your ability to borrow increases. Whether you use that equity or not, it still adds to your personal net worth in ways that earn respect in the eyes of your banker.