If you owe huge amount of multiple debts and have enough equity in your home, then you can consider taking out a second mortgage loan. When you do this, you actually pledge your home’s equity to borrow the required amount. How much you can borrow is based on the difference between the current appraised value of your home and the outstanding balance on your first home loan.

Types of second mortgage loans

Second mortgage is primarily of 2 types, which are discussed below.

1. Home equity loan – It is a fixed rate mortgage with a loan term of 15-30 years. This is a one time loan and you can borrow an amount that does not exceed the first loan balance and the second mortgage combined together.

2. HELOC – Home Equity Line of Credit (HELOC) is an adjustable rate mortgage, wherein the interest rate remains fixed for a certain period and then it keeps on changing periodically. With HELOC, you have the flexibility of borrowing money a number of times as long as you don’t exceed the available credit limit.

When to obtain a second mortgage loan

It would be wise to take out a second mortgage loan under the following conditions.

• Home improvement – A home improvement can increase the value of your property. Therefore, it is always better to obtain a home equity loan in order to make the improvements instead of using your credit cards for the purpose. This is because, the interest on a home equity loan is usually tax deductible (up to a certain limit) and the interest rate is comparatively low than that of credit cards.
• Pay off debts – You can use the borrowed amount to pay off your multiple debts, such as your high interest credit card dues, auto loans or your medical bills. Thus, you can eliminate judgments against you by repaying your existing debts.
• Avoid PMI – A second mortgage loan also helps you avoid purchasing a PMI (Private Mortgage Insurance). You need to buy a PMI when you are not able to make at least 20% down payment on your home. In such a condition, you can take out another mortgage for the 20% of your home purchase price.

Apart from above, you can also take out second home loans to fund your college tuition or even to plan a long awaited vacation with your family. You can also obtain the required cash by pledging your home equity.

However, you actually risk your property when you use your home equity to obtain a loan. Therefore, make sure that it is worth risking your home. Moreover, the interest rate on a second mortgage is slightly higher than that of first mortgages. This is due to the fact that in the event of loan default, you can pay off your second home loan only after you’ve repaid the first one. So, think twice before taking out a home equity loan or HELOC and check your affordability before applying for a second mortgage loan.

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