Second Mortgage - How to use it for Home Improvement

Second mortgages are arranged for various purposes, such as financing home improvements, college tuition fees, debt consolidation or other emergency expenses. If you have gathered enough equity, another option is to refinance your home and borrow funds in excess of your current loan balance.

Homeowners may refinance their home loan to cash-out and pay outstanding credit card balances and consumer loans. Homeowners with an interest-only loan will have their borrowing rate capped at just 2 per cent. Some borrowers may choose to switch from a repayment to an interest-only mortgage until their money problems are alleviated.

If you have been in your home for a few years and you have established some equity, you may be considering doing some home improvement with a second mortgage. Home improvement comes in many forms like a new kitchen, bathroom, roof, siding, etc.

You can acquire a home improvement loan or second mortgage through one of three ways.

1. Refinancing with cash out,

2. A home equity loan, or

3. A home equity line of credit.

Of these three, it is recommended you consider a home equity line of credit. (HECL)

The HECL is a very convenient loan for a home owner because it is not mandatory that you use the funds right away. And when you do decide to use the money, you only use the amount you need.

Assuming you have a home equity line of credit for $50,000.00. The lender will give this money to you as a line for you to use, only when you choose to do so. The line also comes with a check book so you can write checks at your convenience.

A refinance with cash out, or a standard home equity loan is given to you in the form of a lump sum, and you begin paying the interest and principal immediately.

On the HECL you only pay interest and principal when you use the money, and only on the amount you use.

So lets suppose you hire a contractor to put a new bathroom in your house for fifteen thousand dollars. Upon completion of the project, you would than write a check from your HECL check book, it's that simple.

At this time, your monthly payments would begin to kick in.

Most HECL's are amortized over twenty years, and the payment is interest only for the first ten. So make sure you are aware of the payment schedule before you close.

Home improvement is a great step to take with your home. It not only adds value to your house, but it also improves the quality of your life. And the interest is tax deductible.

As always, continue to educate yourself, and make sure you shop around for the best deal.

Second mortgages are easy to get, because the bank considers it a secured loan. You are securing it with the deed on your home. Second mortgages are subordinate , meaning that in the event of default, the primary, or first mortgage would get paid off first, and then any funds remaining would be used to pay off any second mortgages. For this reason, second mortgages typically carry a higher rate of interest. However, second mortgages can create significant challenges in helping borrowers avoid foreclosure, even when a first lien is modified. Up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien.