A second mortgage is a loan that enables you to take funds against the value of your property's equity above your primary mortgage. An asset like a home has every tendency to gain value over time. Second mortgages are an excellent means of using your property for other projects without selling it outright.
What is a second mortgage?
A second mortgage is a loan type that is similar to the one you might have used to buy your home. It is a loan that uses your home as collateral. The credit is referred to as a second mortgage because your first loan is the one that is covered by a lien on your property. The second mortgage takes advantage of the market value of your home compared with any loan balances. Ideally, equity increases over time and can change in different ways.
A second mortgage can come in diverse forms such as:
Lump sum: A standard second mortgage can be given to you once, and it provides you with a considerable amount to use for whatever you want. The repayment is gradual, spanning over a specific period. You will be required to pay a fixed amount of money monthly. Each payment contains a part of your loan balance as well as a portion of your interest cost just like your primary mortgage.
Line of credit: You can also borrow using a line of credit or a large amount of money from which you may draw. You don't need to take any money when you go for this type of loan—but the option to do so is available if you want.
Rate choices: Depending on the type of loan you prefer, there may be a fixed rate attached to your loan that will assist you in planning your payments. Variable-rate mortgages are very common for this line of credit.
Advantages of a second mortgage include the following:
Interest rates: One of the benefits of going for a second mortgage is the lower interest rate when compared with other types of debt. Also, your lender's risk is minimal because you are securing the loan with your property's equity.
Tax Benefits: Interest paid on the second mortgage attracts some deductions in most cases. Check with the person preparing your tax return before taking deductions.
Large amount: With a second mortgage, you can borrow a significant amount of money to help you with your financial needs. The main reason for this is that your home secures the loan and its value is usually high.
Before taking a second mortgage or line of credit consider if you plan to sell your home soon. Confer with your financial planner to make sure your new loan is in your best financial interest.
