Many people are taking advantage of today's historically low interest rates to take out a
2nd mortgage on their homes to consolidate debts, make home improvements, purchase a newer vehicle or investment property or business or to simply take a much needed vacation.
Second Mortgages are exactly like first mortgages in that they are a loan secured against the equity of your home. They are usually a lump sum loan, where you make set monthly payments for an agreed upon period of time, although some loans give
you the option of receiving the money as a line of credit instead. The loans can last anywhere from one to five years and they typically have a fixed interest rate, although this is usually slightly higher than the current rates of a frist mortgage loan. Not unlike other loans, interest rates are determined by number of factors including:
Your Credit score - the better your score the lower the interest rate
Loan Amounts - Lower loan amounts are a lower risk to the lenders
Loan To Value - The amount of equity remaining in your home after the loan is made - The more equity you have the better chance you are going to be approved
Second mortgages are getting more and more appealing because they can provide a large quantity of money and low interest rates. Its becoming more common for people to consolidate their credit card, car loans, and other debts into a low-interest 2nd mortgage so that they can make one, easy monthly payment and save hundreds, if not thousands, in
interest over the life of the loan. And, not only are people saving money on their interest rates, most 2nd mortgage interest is even tax deductable!
In addition to being able to consolidate debt, many borrowers are using their untapped home equity to purchase, cars, boats, and vacations, doing home improvement projects that further increase the value (and equity!) of their home such as putting a swimming pool, remodeling their kitchen, or adding a garage, paying for college tuition, or even purchasing a second vacation home or rental property.
Of course anytime that you are borrowing money there are some pitfalls to avoid. Many people that use a 2nd mortgage or home equity loan to consolidate debt never learn their lesson. As soon as they free up the extra money every month they ruin out and apply for more credit. Now, they are not only still in
debt but they have put their home up as collateral and, now, if they fall behind in their payments they could lose their home.
