Second Mortgage Loan Second Mortgage Tips

  by Rebecca K. O'Connor

According to secondary mortgage financier Freddie Mac, "In 2005, $204 billion of home equity was pulled out." If you are thinking about taking out a second mortgage, home equity loan or home equity line of credit, or refinancing in order to utilize your available equity, you're not alone. Depending on home equity rates and the products available to you, it may make good sense to use your equity for purchasing investment property, to improve your own property, or for other purchases that require loans. The Gallup organization estimates in a recent poll that one in four homeowners have taken out home equity loans and home equity lines of credit.

Home improvement is the most common use of funds and can be a smart investment. By cashing out your equity and utilizing it to make value-increasing improvements to your home, you can make your money work for you. This can be a particularly smart use of a home equity loan or refinancing to withdraw equity if you are certain that you will be selling your home sometime in the future. Thirty-five percent of home equity loan dollars are used for home improvement and maintenance projects according to a Federal Reserve Bank report that was published in 2002 and is still used by the Fed today.

Repayment of debt is the second most common use of withdrawn equity at 26 percent, followed by consumer spending at 16 percent. Using your second mortgage to pay off your credit card debt can give you a much lower rate and help you get out of the hole. If you are planning to make a large purchase, like a vehicle, you may get a better rate by utilizing your equity.

All of these are great reasons to tap into the value of your house, but what's the best product? There are many choices and likely one that's best for you. Previously home equity lines of credit have been a great way to get low monthly payments. Home equity lines of credit grant you flexibility and you pay interest on the amount owed and nothing more. Many home owners use their home equity credit line like a credit card, withdrawing funds as needed and paying some or all of the balance before drawing against the credit line again. This can be a smarter way to use credit than with a high interest credit card. However, home equity lines of credit are indexed to the prime rate, which means that the borrowers' minimum monthly payment increases whenever the Federal Reserve raises short-term rates. If you don't plan on immediately paying off the credit line, the increase in rates may make a fixed rate 2nd mortgage the best choice for you.

If you have a home equity line of credit already and aren't prepared to pay it off, you may even want to consider replacing it with a fixed-rate home equity loan or do a cash-out refinance on the first-lien mortgage. If you think you are going to sell your home in five years or feel confident that rates will go down by the end of the five years, refinancing with an adjustable-rate mortgage may help save you some money on monthly payments. Refinancing with a fixed mortgage rate is less risky in the long run, but will cost you more in monthly payments. You may also want to consider taking out a home equity loan to pay off your home equity line of credit. If you're smart, even with the rates rising, you can make your home work for you!

About the Author

Rebecca O'Connor is an experienced free-lance writer who produces consumer directed articles about mortgage refinance and home equity loans. You can read more mortgage related loan articles online at http://www.bdnationwidemortgage.com/