Six "Must-Knows" About Second Mortgages

Every big decision has certain factors you must know. Before you offer or accept a marriage proposal, for example, you'll need to know if your companion has any meddling relatives or odd, compulsive habits. In the same way, mortgage loans have qualities that can be deal making or deal breaking, as well. Learn these points now to find out if you and that second mortgage are truly compatible.

Number 1. They come in two varieties.

Second mortgages can be structured as home equity loans or home equity lines of credit (HELOCs). To compare the two, consider the differences between an auto loan and a credit card. Home equity loans, like auto loans, fund the money all at once. You then make fixed monthly payments of principal and interest. A HELOC, however, functions more like a credit card. You can borrow, repay, and then borrow again, as long as you don't exceed your approved credit limit. Your monthly repayment obligation might be interest-only or interest plus a small percentage of the outstanding balance. Since the HELOC interest is variable, your minimum payment can increase or decrease, even if your outstanding balance doesn't change.

Number 2. They're easier to obtain than a mortgage refinance.

Getting a second mortgage approved and funded is usually pretty straightforward. Relative to a mortgage refinance, the paperwork is minimal and the turnaround time is short.

Number 3. Fees are low, and sometimes non-existent.

With second mortgages, it pays to comparison shop. If you have good credit, you're likely to find a low-fee or even a no-fee loan or line of credit.

Number 4. Interest may be tax deductible.

You can generally deduct the interest paid on the first $100,000 of a second mortgage, no matter how you use the money borrowed.

Number 5. You can lose your home.

Putting your home up as collateral is a double-edged sword. The good side is that your loan is less expensive because the lender is partially protected against loss. The dangerous part is that you're increasing your risk of losing your home. If you default, the lender will foreclose and sell the house. It's vital to be entirely confident that you can afford the required payments.

Number 6. Higher interest rates than first mortgages

Interest rates are related to the lender's perception of risk. Because a lender considers a second mortgage riskier than a first, they generally carry a higher interest rate.

If you still believe you can commit to a second mortgage, start shopping around. Ask lots of questions and compare offers from several lenders. When you're ready, you can pop that special question: "Where do I sign?"