Making Sense of Second Mortgages

You may have heard it called home equity, home equity line of credit, home improvement loan, debt consolidation loan or second mortgage. All of these names imply the same thing, which is a second home loan on top of your current mortgage. The difference is that you are actually borrowing back money you have already paid the lender.

Most people use home equity, which is the amount of your home mortgage that you have already paid off, for home improvement or large expenses such as college or auto purchases. Like with your original mortgage, you are charged interest on top of principal until you pay back the loan.

The good thing about second mortgages is that they may be tax deductible if the loan is for your primary residence. Usually for home loans up to $100,000 you will get a 100 percent deduction.

If your second mortgage is $35,000 or less an appraisal is probably not required. If your loan is over this amount you may need an appraisal. As amounts vary from one mortgage lender to another, it is best for a borrower to carefully check the guidelines of each and every potential lender’s guidelines. If you have owned your home for less than a year, the purchase price may be considered the value.

Mortgage rates are generally determined by the primary borrower’s credit scores and the loan to value ratio. You may get a loan up to 125 percent of value but this depends on your credit scores, debt record and loan to value ratios. If you are worried about your job or income looking bad, remember that some lenders do not require verification of an in order to approve you for a loan.

A second mortgage is great for saving money. You can reduce your interest rates and payments, convert compound interest into simple interest and make taxes on old debts deductible.