Why are Second Mortgages Important?
A second mortgage can provide several benefits to homeowners, giving them more flexibility in the way they live compared to having just a first mortgage. A second mortgage is packaged as either a home equity loan or an equity line of credit, which means these funds are repaid much in the same way as a first mortgage. No matter how the money is borrowed, a second mortgage offers some important benefits to the borrower.
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A second mortgage is based on the equity a homeowner has built up in his home. By paying down his mortgage or enjoying an increased home value -- usually both -- the homeowner can access some of those funds. A home equity loan offers a lump sum distribution while an equity line of credit can be tapped as needed by writing a check or by using a debit card.
Flexibility
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The homeowner can use equity funds to add a room to a house, make repairs or undertake some other home-based project. Funds may also be used to consolidate debt, pay for education, pay down medical bills or cover emergencies. You can buy a car, take a vacation or purchase new furniture with your second mortgage. Control of the funds is up to the homeowner, an important consideration for these types of loans.
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Tax Deduction
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Like a first mortgage, a second mortgage can provide a tax deduction for those who itemize their tax returns. The Internal Revenue Service Publication 530, Tax Information for Homeowners, considers both first and second mortgages the same. You can deduct taxable interest adding your first and second mortgage interest to line 10, Schedule A. Your lenders will provide Form 1098 to you for your tax return forms which are due by Jan. 31 following the most recent tax year.
Considerations
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Second mortgages are important to lenders as they are treated as a secondary lien on your home. This means if your home is foreclosed, the holder of your first mortgage gets paid off first. As a result, your second mortgage carries a higher interest rate to go with the increased risk your mortgage provider must assume. You will also pay closing costs and related fees for most second mortgage arrangements.
Warnings
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A second mortgage can put your home at risk particularly if the amount you borrow strains your budget. Consider working with a financial professional to discuss your options including the feasibility of paying off high-interest unsecured credit card debt to take out a secured home loan.
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