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If you’ve owned your home for a while and have not refinanced, you may have a lot of equity wrapped up in your home. Equity is the difference between what you owe on your home and its current value. A second mortgage can help you leverage the equity in your home by borrowing against your equity, allowing you to use it to make large purchases such as home renovations, paying off student loans, or even buying a car. 

Taking out a second mortgage can give you access to large chunks of cash, but before you sign on the dotted line, there are a few things you should know.

Costs

Taking out a second mortgage often has similar costs to your first mortgage. There will be an appraisal fee along with other fees charged by the bank. While your interest rate may be lower when you borrow against your mortgage rather than, say, adding debt to a credit card, don’t forget to calculate these fees when you’re estimating which would be the more beneficial route to take in borrowing money.

Interest rates

You may be surprised to find that the interest rate you get on a second mortgage is not as low as the interest rate for your first mortgage. The reason for this is that, should you default on your payments resulting in home foreclosure, your first mortgage would receive priority over your second mortgage. The bank financing your second mortgage is taking more risk than the bank that financed your first mortgage, resulting in higher interest rates.

What to use it for

Since you’re borrowing against the place you live, choose wisely what to spend the money on. Using second mortgage funds to complete home renovations may be wise since it could increase the value of your home; however, making other purchases with these funds may not be a wise choice. 

For example, according to Rate Rush, using a second mortgage to pay off student loans may not be wise, since student loans have special allowances providing for payment deferral during hardships. Before paying off other loans with a second mortgage, be sure you’re looking at all aspects of the loans themselves.

Making payments

Taking out a second mortgage means that you are putting your home up for collateral against the money you borrow. It’s very important to make your payments on time, just as with your first mortgage. Not making payments on a second mortgage puts you at risk for foreclosure, which means you could even lose your home if you don’t make your payments.

There are a lot of great reasons to take out a second mortgage. It can give you access to a large amount of cash that might otherwise be unavailable, and help you make big purchases with a lower interest rate than you would have on a credit card. However, it is a financial decision that should be entered into carefully and with a lot of thought.