Second mortgages have been accused of playing the role of bad boy in the mortgage crisis. Many borrowers, who wanted to buy homes with no money down, were piggybacking second mortgages on top of first ones. In addition to new homes, they were acquiring massive amounts of debt. Since everyone "knew" that housing prices would continue to climb, no one was worried about paying those loans back. They could always refinance and get more money out of the increased home equity to cover whatever financial woes they encountered.
Unfortunately, when housing prices plummeted, and interest rates on adjustable-rate mortgages (ARMs) skyrocketed, many homeowners were unable to pay their bills. Refinancing was out of the question, since they were underwater - their mortgages were higher than the value of their homes. These same homeowners, who were celebrating their no-cash acquisitions, were unable to take advantage of government programs to help bail them out, because those programs were targeted for first mortgages only.
But second mortgages aren't bad boys at all. In fact, a second mortgage can be a real financial savior if it's used for appropriate reasons. Here are the three best ways to use a second mortgage.
1. Increase your home's value.
When you invest money in your home, the benefits are two-fold: You'll get back a portion of your investment when it's time to sell, and you'll enjoy the improvements during the time you remain in your home. The most popular renovations - kitchens and bathrooms -- will give you a return of 65 to 75 percent of the amount. The balance of that percentage is the joy from improving your lifestyle.
2. Lay the groundwork for increased income.
If you want to release your inner entrepreneur and start a new business, a second mortgage may be the most appropriate means of financing it. Small business loans have higher rates, and you may not qualify for one without an established business, especially in a tight lending environment. If you use a home equity loan as seed money, make sure that your business is based on a solid foundation and has a market for your products. It's only a good idea when the potential reward is realistically greater than the risk involved.
3. Make an investment in your child's future.
Whitney Houston was right when she sang, "children are our future." In order to prepare them for what lies ahead, a college education is a must. The cost of tuition for four-year colleges ranges from $9,000 to $35,000 per year. Not everyone has that kind of cash sitting around their bank accounts. Even with scholarship money, many families still experience shortfalls. A second mortgage can help fill the gap when scholarships and student loans aren't enough.
Bad boys lead you down the wrong path. But deep inside every one, there's good if you know where to look. Second mortgages have gotten a bad rap, but if they're used correctly, they can be the perfect financial solution to help you realize your financial goals and dreams.