A second mortgage has both pros and cons

This was originally published on Monday,March 17, 2014, in the Pacific Daily News.  Click here to subscribe to the PDN.

A second mortgage can be an option to paying large bills or expenses.

Because you are putting your house up for collateral, the stakes are even higher than a traditional loan. If you are considering borrowing from the available equity on your home, you may want to consider the pros and cons of a second mortgage.

Pros

• The money from your second mortgage can be used on anything and is not limited like a personal loan or even credit cards. It can be used for home improvements, college tuition or even a vacation.

• The interest you pay on your second mortgage is usually tax deductible, unlike that from a credit card.

• A second mortgage usually carries a higher interest rate than your original mortgage but can be lower than rates on a personal loan and certainly lower than rates on a credit card.

• If you take out a second mortgage, you leave your original mortgage alone. You have access to a large sum of quick cash if you use a second mortgage.

Cons

• The most important and risky aspect of a second mortgage is losing your home.

• If you default on your mortgages, your other assets may be used to pay off the deficit of the second loan.

• Banks are being more selective; people with average credit scores are being denied or offered a higher interest rate. Most banks look for a score of 720 or higher.

• A second loan will add more debt to your home. It could mean that it will take longer for you to be able to own your home free and clear of any debt. The longer you extend your payments, the more your house will cost over the life of the loans.

• You may be borrowing more than you what you actually need.

• If the real estate market dips and your home depreciates in value, you may be owing more than your house is worth.

• Fees and lots of paperwork, comparable to the when you applied for your original mortgage.

Banks are not only the institutions that can offer a second mortgage.

Talk to your lending institution first, the history you have may reduce some of the fees.

Ask friends or family who have taken out a second mortgage about lending institutions they have used.

Talk with banks, credit unions, mortgage companies or a lending institution. It is important to shop around to get the best interest rates.

Understand the terms and don’t be afraid to ask questions. If you are unsure if you want to take equity out on your home or that a second mortgage is not the right choice for you, talk to your lender about other alternatives; consider refinancing, an unsecured personal loan, or a loan secured by a certificate of deposit.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

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