A 2nd mortgage is a secured loan borrowed against the property that has already become a security in a loan previously. It is the second loan taken after the first loan and is secondary to the first loan on the same property. The 2nd mortgage lender can use his rights only once the rights of the first have been fulfilled. You can take the 2nd mortgage for various reasons like repaying some debt, to fund education or even to remodel your house. If you think your debt repayment is quite big, then you can opt for a 2nd mortgage.
There are normally 2 types of 2nd mortgage:
Fixed Rate Loans
Line of credit
Fixed Rate loan: The 2nd mortgage as a fixed rate loan is jut like a first mortgage where you can obtain a lump sum payment and then repay the loan in installments through a fixed period of time. The way it differs from the first is that the 2nd mortgage lender can only use his rights on your home, only if the rights of the first mortgage holder have been met. As the mortgage lender has to put up with higher risk, the rate of interest on the 2nd mortgage home loan is usually more than the first one.
Home-equity Line of Credit: A home-equity line of credit is a variable rate loan, where the borrower gets a certain spending limit and can withdraw money as and when needed till the amount reaches this limit. Normally, a variable interest rate is levied on the money withdrawn that can cause increase in interest paid, should the interest rates rise.
Both these loans will assist you in lowering your unpaid debt. Also, 2nd mortgage may also save some tax, since you can subtract the interest from your income at the time of computing your tax liability. But you must be cautious while taking a 2nd mortgage loan. If the total value of both the 1st and 2nd mortgage is more than the value of your home, you would have problems, since the even after selling your house, you will be unable to repay both your debts. 2nd mortgage or home-equity loan became very popular in 1996.
Though the interest charged on a 2nd mortgage loan is normally more than that charged on a 1st mortgage, it never exceeds the interest charged on credit cards and other consumer loans. The main reason why people go for a 2nd mortgage loan is to repay the outstanding dues on credit cards. So along with lower interest (vis-à-vis credit cards), you are also eligible for tax benefits of a 2nd mortgage. But before mortgaging your house another time, ensure you can comfortably repay the loan installments by its due date. But if you think you are a responsible borrower and earn steady and regular source of income to pay the loan along with its interest, then you can certainly go for this loan.