Should You Take Out a Second Mortgage to Buy a Used Boat?
A second mortgage can turn the value of your house into cash. Second mortgages -- also known as a home equity loan or home equity line of credit -- are loans that use your house as collateral for debt. The interest rate is low, so these loans are often used to consolidate high-interest debts, but some home owners use them to finance large purchases instead.
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Numbers
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A second mortgage is a loan you borrow against the equity in your home, the property value above the first mortgage. If you own a $100,000 home with a $60,000 mortgage, for example, you have $40,000 in equity. Most lenders will not let you borrow against all of your equity; a few will allow you to borrow up to 100 percent or even 125 percent of the equity, but these loans come with steep interest rates.
Advantages
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If you're looking to make a major purchase, such as a boat, a home equity loan offers several advantages. With your house as security for the loan, lenders are willing to offer better rates than on unsecured debts, such as credit cards or personal loans. Like a first mortgage, you can deduct the interest on your taxes, though if you take out a loan for more than 100 percent of your equity, you can't deduct interest on the unsecured part of the loan.
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Drawbacks
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The biggest drawback to a home equity loan is that if you default, it puts your home at risk, which isn't the case with credit cards. Even with a good interest rate, paying back the debt will add to your monthly payments. If you're already heavily in debt or your income isn't secure, it's a mistake to take out a second mortgage you can't afford. If you have a history of overspending or poor money management, another loan for a pleasure purchase can make things even worse.
Alternatives
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A second mortgage isn't the only way to buy a used boat. As with buying a car, you can take out a loan that uses the boat itself as collateral. If the boat is small, the price low and your credit good, you may be able to take out a term loan from your bank at an affordable rate. When figuring out the best alternative, keep in mind the added costs of maintenance, repairs, docking and fuel you may have to pay after the boat is yours.
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References
- HSBC --- North America Military Financial Education Center: Second Mortgage or Equity Loans
- Nolo; Home Equity Loan and HELOC Basics; Alayna Schroeder
- Real Estate Webmasters; Should I Take Out a Second Mortgage on My House?; July 2007
- "MortgageLoan.com"; How to Finance a Boat; Anders Bylum; October 2007
Resources
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