Using Second Mortgages

Second mortgages, also commonly known as second liens, are unsecured loans secured by the original mortgage as well as a second mortgage on the same property. Depending upon the time in which the second lien is originated, usually the loan is structured as either a private second mortgage or a piggyback second mortgage. A second mortgage combines the debt of the first mortgage with the equity of the second mortgage, thus combining the two into one loan. This option has many advantages over other options.

One of the most common uses for second mortgages is to finance home improvement projects. This may include constructing a new home, adding a deck, painting a house, adding a room to the house, and so on. In order to qualify for a second mortgage, the borrower must demonstrate a sincere desire to repay the loan. Borrowers who simply want to build on the property are not qualified. Another common use for second mortgages is to consolidate one's debt, often by taking out a second mortgage on one's home equity. With a second mortgage, borrowers have the convenience of only having to make one monthly payment, instead of several.

The biggest advantage of second mortgage lenders is that they charge less interest than the original mortgage. This is because the initial loan is usually much smaller and therefore pays out less interest overall. These loans are subject to credit requirements just like first mortgages. If a borrower fails to keep up with payments, he or she may end up losing the home. This situation is rare, but does happen, so borrowers should always make their payments on time.

Some second mortgages are based on a depreciated value of the home. This means that the equity will decrease with time. For this reason, interest rates on second mortgages are typically lower than their original rate. Just as with the original loan, a borrower can prepay his or her second mortgage in order to avoid paying additional interest.

It is important to remember that second mortgages are not tax deductible. This means that the amount owed will not be available as an itemized deduction on income tax returns. This is also true for the original mortgage. In some cases, however, these loans can be tax exempt if owned for fewer than five years. This is especially true for home equity loans that are held for remodeling expenses or as a down payment on a home.

When considering second mortgages, it is important to calculate the loan amount carefully. Remember that the interest rate and monthly payments are only part of the total costs incurred. There are closing costs to consider as well as loan insurance premiums. While the costs are low compared to other forms of loan, it is still wise to shop around and borrow from several lenders. Continue reading for more information regarding this topic:

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