Why or Why Not Get a Second Mortgage?

If you recently bought your very own house, you probably know that it's your largest asset. Most people never buy anything that costs more than their home- when you're facing financial difficulty, your first instinct may be to tap into your home's value. Borrowing money against your home's equity when you already have a mortgage is called an equity line of credit, or a second mortgage. In this guide, you'll learn why you should (or shouldn't) get a second mortgage.

Second mortgage funds can be used for anything you choose- your child's college tuition, making home repairs, to buy a car, or to finance the trip of a lifetime. However, you shouldn't borrow against any portion of your home's equity that you might need later on. If the second mortgage is needed for something that can be postponed, or something that's not absolutely vital, you should consider delaying it or looking for alternate funding. When you take out a second mortgage, you are slowly losing the equity you've built in your home. If you lose your job or have another financial hardship, you may end up losing your home when you cannot afford the payments.

Also, the real estate market and the economy fluctuate regularly, making it difficult to predict your future based on the amount of equity you have in your home. Five years from now, your property value could significantly decline, and you could end up owing more than your home is worth and losing your investment. In this case, your home would go from being your biggest asset to your biggest liability.

A good thing about a second mortgage is that it is a fixed-rate loan, unlike a credit card or home equity line of credit. With second mortgages, you'll know just how much you'll be paying each month, making it easier to draw up (and stick to) a budget. Take a look at your income, and all other money coming into your household. Then, write down what you pay out each month, for food, gas, bills, and mortgage. Next, get quotes from your current lender as well as up to three other lenders or brokers, to figure out how much a second mortgage will add to your monthly bills.

The single biggest mistake that most homeowners make when considering getting a second mortgage is getting it sight unseen. After all, you wouldn't buy a car without test driving it, so why would you borrow money when you are unaware of your financial standing? Sometimes, it's best to talk to a financial advisor before getting the second mortgage. A pro can help you go over your financial records, and can help you determine the benefits and drawbacks, making it easier for you to come to an informed decision.