Second Mortgages: Why Take Out a Second Mortgage?

People get second mortgages for a variety of reasons. Sometimes they want to consolidate their debts. If you consolidate all of your credit cards you can get an interest rate which is much lower. A lower rate of interest will save you money in finance charges over the life of the loan. Most of the times when you consolidate your debts you are combining all of your bills into one which gives you the convenience of having to make only one monthly payment. You also save on postage if you pay your bills by mail. A lot of this type will also save you a lot of time as well.

When you get a second mortgage you are using the equity in your home as collateral or security for the loan. If you don't pay on time the bank or lending institution can foreclosure on your home. In some states if your home is foreclosed upon and sold at an auction you could be responsible for any deficiency balance remaining after the sale.

You can also take out a second mortgage when you first purchase your home. A second mortgage can help you avoid paying private mortgage insurance, (PMI), which is insurance you have to pay if you don't put down 20% at the time of purchase.

There are several types of second mortgages that you can receive. The first is a home equity line of credit, (HELOC). You are assigned a credit limit which you can access whenever you want. Normally you can access the cash by using the checks that are issued when the loan is approved. HELOCs can have terms from 5 years to 25 years and the interest rate is variable. If the interest rate goes up your payments could go up. A HELOC is reusable. Once you pay it off you can access the account again.

Another type of second mortgage is the home equity line of credit which is similar to the HELOC. With a home equity loan the term can go up to 15 years and the interest rate is fixed. You never have to worry about your payments increasing and you know exactly when this type of loan is supposed to be paid off. When you pay off a home equity loan you are not able to access the account again. This type of loan is a closed end loan. The interest on a HELOC and home equity loan can be tax deductible.