A 2nd mortgage refers to a secured loan taken on a property, which has already been used as a security in a loan once before. It refers to the second loan in sequence, as it is subordinate to the first loan on the same property. The 2nd mortgage lender can exercise his rights only after those of the first have been entirely met. One can take the 2nd mortgage for several different reasons including for paying off some debt, to finance education or even to renovate ones house! If you feel that your debt repayment is pretty huge, then maybe you should consider taking a 2nd mortgage. There are generally two types of 2nd mortgage:
· Fixed Rate Loans
· Line of credit
Fixed Rate loan — The 2nd mortgage at a fixed rate loan is similar to a first mortgage where you can get a lump sum payment and then pay up the loan in installments over a set period of time. The difference with the first mortgage being is that the 2nd mortgage lender can only exercise his rights on your home, after all the rights of the first mortgage holder has been satisfied. Since the mortgage lender is subject to increased risk, the rate of interest on the 2nd mortgage home loan is generally higher compared to the first one.
Home-equity Line of Credit — a Home-equity line of credit is a variable rate loan, where the borrower is assigned a specified spending limit and can withdraw money as and when required up to this limit. Generally, a variable interest rate is charged in this case, which can lead to increasing interest burden in case of a rise in interest rates.
Both these loans can help you reduce your debt burden. Additionally, 2nd mortgage would also lead to some savings in your tax, as the interest can be deducted from your income while calculating your tax burden. However, one must be careful while availing a 2nd mortgage loan. If the combined value of both the 1st and 2nd mortgage exceeds the value of your home, you could be in a position where you will even the sale of your house will not be able to pay off both your debts. 2nd mortgage also known as home-equity loan gained wide spread popularity in 1996.
Though the interest chargeable on a 2nd mortgage loan is generally higher than that charged on a first mortgage, it is never the less lower than the interest which is paid on credit cards and other consumer loans. The primary reason why people avail of a 2nd mortgage loan is to pay off their balance dues on credit cards. So in addition to lower interest (compared to your credit cards), one can avail of tax benefits also via a 2nd mortgage. However, before mortgaging your house for a second time, make sure you have the means to make the payments before its due date. But if you believe you a responsible borrower and have a steady and regular source of income to meet the loan along with its interest obligation, then it makes sense to avail of this loan.