Sometimes you need extra money for a major purchase, home repair or to prevent financial collapse. You look to your house, but you’re paying on the mortgage that allowed you to purchase it. A second mortgage can give you some cash out of your home's equity. You give the bank a second deed of trust to guarantee that you'll pay back the home equity loan. Before you plunge into a second mortgage, however, consider why you need the extra money, the tax consequences and whether you want to put your home at more risk.
Creation
The bank takes a second deed of trust when you borrow against your home's equity. You figure it by subtracting what you owe for the first mortgage from the home's value. The amount you can borrow is typically 80 percent of the equity so that the bank is protected against falling property values, especially when the economy goes south. Thus, if your home is worth $100,000 and you owe $60,000 on a first mortgage, your equity is $40,000; if the limit is 80 percent, the bank will loan you up to $32,000. The second deed of trust guarantees either a one-time loan or a line of credit, in which you write checks up to the limit.
Uses
Your home's equity can buy add-ons and other home improvements, above-ground swimming pools, cars and heating and air conditioning systems. Cities like Bremerton, Washington, offer rehabilitation or home-improvement loans, backed by a second deed of trust, for low-income homeowners with equity. You might think about a second mortgage to reduce or wipe out credit card bills, pay for your children's college education and provide urgently needed cash.
Advantages
Second mortgages can free you from higher credit-card rates. Loans backed by your abode are not as risky as unsecured credit. If you don't pay back your credit card, the company stands a good chance it won't see any of its money; mortgage lenders likely get something if not all of its money. Second deeds of trust means tax breaks for the interest you pay if you itemize, up to a $100,000 loan for spouses filing jointly. You don't get to write off interest on that plastic in your purse or wallet.
Disadvantages
A second deed of trust brings you a second house payment. If you miss credit card or car payments, the card or finance company can't foreclose. You will stand a better chance of keeping your house because you can protect at least part of your equity from being used to pay a judgment. However, if you have a loan backed by a second deed of trust, the bank can take your home. The first mortgage holder gets paid first, then your second mortgage gets paid; if your home's value drops, you have nothing left after the foreclosure.
References
- Indiana Department of Financial Institutions: Home Equity Loans and Lines of Credit-Mini Lesson
- The City of Bremerton, WA: Community Development: Housing Rehabilitation
- Internal Revenue Service: Publication 936: Home Mortgage Interest Deduction
- Portland Community College: Panther Tracks: Going Into Debt
Resources
Writer Bio
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.