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If your home has equity and you need cash for reasons such as renovations, reducing credit card debt or investing in property, then you might benefit from a second mortgage loan. As home values rise, people across the country, including in Irvine, CA, are taking out the loans because their interest rates are relatively low. The interest is often tax deductible as well.

The Basics

The loans, also called home equity loans and home equity lines of credit, are a second mortgage on your home. A second mortgage loan is similar to your original mortgage loan in that if you miss payments, you could lose your home. In such an instance, however, the holder of the original mortgage is paid first.

A second mortgage that equates to a home equity loan normally comes with fixed interest rates. You get your cash up front in a big sum. However, if your loan is like a home equity line of credit, it functions similarly to a credit card and has adjustable interest rates. With a line of credit, you should use the money only if necessary.

Why Get One?

The reasons to get a second mortgage loan are similar to the reasons you might want to refinance: paying off debt, performing home maintenance, home renovations, funding educational endeavors that stand to pay off a few years later when you obtain a higher-paying job. Because you put your home up as collateral when you take out such loans, try not to use them for reasons such as buying TVs or taking a vacation.

With credit card interest rates being fairly high, homeowners find that they save lots of money by taking out second mortgages rather than using their credit cards.

Associated Costs

Just like with pretty much any loan, a second mortgage comes with closing costs as well as fees for the application and appraisal. Also, if lenders determine that your credit score makes you somewhat of a risk, you may also have to pay higher interest rates than people who have higher credit scores.

Some second mortgage loans come with penalties if you miss a payment or send in a payment late. The penalties could raise your interest rate significantly, which you don’t want to happen. So, try to take out loans that have no default penalties whatsoever. Along those lines, avoid loans that impose penalties if you pay them off early.

How Much Money You Could Receive

The equity in your home is commonly the biggest determinant of how much you stand to get from a second mortgage loan. The lender will probably want to appraise your home to check on its value, and the majority of lenders lend no more than about 80 percent of the sum of your original mortgage and the second mortgage. For example, say your home is worth $200,000, and your down payment and monthly payments have put the balance you owe at $100,000. Eighty percent of $200,000 is $160,000, meaning that you could qualify for as much as $60,000 on your second mortgage.

Tax Considerations

Check with an accountant for specifics in your case. Generally, though, you can claim interest deductions on your second mortgage on at least the first $100,000 of the loan. If you’re using the loan to renovate, remodel or maintain your home or to buy additional property, you may be able to deduct interest on the first $1 million you pay, or the worth of the home.

In a Nutshell

The bottom line is that if you need to renovate or remodel your home, or see potential in a second property investment, then a second mortgage loan stands to save you more money than using your credit card, which most likely carries higher interest rates. If you’re using the loan to pay for education, that can also be an excellent use of your money, but draw up a plan in case your job situation does not turn out the way you expected. Avoid using second mortgages for optional purchases such as furniture and vacations, and always compare multiple quotes and fees.

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