Should I Get a Second Mortgage or Home Equity Line of Credit?

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Lots of people talk about getting second mortgages. But second mortgages, while they have some attractive features, aren’t always the best option. You and only you can decide whether a second mortgage is right for you. These suggestions may help.

Determine what you’d do with the money.

You’re not legally restricted in how you use the money from a second mortgage. The best option, of course, is to invest it. Set it aside to fund your child’s college education. Pay off the debt on a credit card. What you don’t want to do, though, is take it out and spend it. Keep in mind too that a second mortgage can complicate refinancing your home, if that should ever look appealing. It can also be a problem if you have to modify your mortgage loan in any way or if you have to sell your home for less than what you still owe on it. Borrowers often use a second mortgage to finance an investment property. That’s not a bad way to go, but it does carry a substantial risk: any downturn in the housing market, and the value of both properties can plummet as well.

Determine which type of loan works best for you.

Two types of loan products are available.

  1.  A Home Equity Loan: This works like any mortgage. Fixed-rate loans cover just about any term, though 15- and 30-year loans are most common. For shorter repayment terms, adjustable-rate mortgages are generally available.
  2. A Home Equity Line of Credit (HELOC): This works more like a credit card than a typical mortgage. What it does is let you borrow against a revolving line of credit determined by the equity you have in your home. Interest rates are variable, and there are no term limits.

Determine whether or not you qualify.

There are three determining factors here:

  1. How much equity you have in your home (since you're borrowing against your stake in its ownership)
  2. Your income and whether it's substantial enough to cover your second-mortgage payments, and
  3. Your credit score - not surprisingly, the higher it is, the better the chance of getting your second mortgage approved. 

If you meet these three requirements, and if you’ve carefully weighed your options as well as the risks involved and still think this a good idea, then, yes, you can get a second mortgage and ought to pursue it.