Using Your Home to Finance Other Purchases
Written by Fiona Gu   


As life goes on, there comes a time you need extra cash – and fast. One of your biggest assets and investments is your house. During normal periods of economic prosperity, the housing market is rising, and with it, housing prices. So, people often look to the equity they have built up in their houses to provide that extra source of financing. Here are a few ways one might do this, and a few examples of what each type might be used for.


Types of Second Mortgages

A second mortgage is an additional loan that is secured by the same property as the first mortgage was. Home equity is often the source of the collateral for the second mortgage. There are 3 types of a second mortgage: traditional second mortgage, home equity loan, and home equity line of credit. All 3 types are extremely similar to one another. The main difference between a traditional second mortgage and a home equity loan is their reference. A traditional second mortgage mainly refers to the debt itself while a home equity loan refers to the legal lien instrument.


Picking the Appropriate Type

Traditional Second Mortgage
There are certain situations where you should consider cashing out your home equity to obtain a second mortgage. The list below illustrates some of the possible scenarios.
  • You have a large amount of debt that needs to be paid off.
     
  • You wish to consolidate your many high interest rate debts into one, lower interest rate debt and monthly payment.
     
  • You are considering investing in a business.
     
  • You do not want to pay for private mortgage insurance.
Tip: Make sure that the rate of return from the potential investment is higher than the second mortgage rate. This is the only way you can be profitable in your investment.


Home Equity Loan
Aside from your home, a home equity loan can also be used to finance other expenses. Home equity loan is usually used for a large one-time spending. It is most suitable to finance the following activities:
  • Home improvement,
  • Car purchase, and
  • Other personal purchases.

Home Equity Line of Credit (HELOC)
A HELOC is often applied to ongoing costs for a long period of time (as in a revolving line of credit). It is most suitable for the following cases:
  • Education finances,
  • Unexpected medical expenses..

A Word Of Caution

As explained above, a second mortgage can help you to pay off many other expenses. Many experts agree that a second mortgage is an extremely good option to help people to pay off debts and expenditures. However, this may not be a good medium for you. You still need to pay back the second mortgage within a specified time period.

If you obtain a home equity loan to pay off your current debt but soon max out a new credit card, then it would be impossible for you to repay the second mortgage. Therefore, it is extremely important that you learn from your past mistakes and avoid putting your home in jeopardy. You should definitely evaluate your own ability to repay the second mortgage before signing up for any loan. The last thing you want to happen is to have your home taken away by your lender.
 
Also, please keep in mind that second mortgage loans usually have a higher interest rate than the first. So definitely talk to a professional expert about your particular circumstances in advance. A second mortgage is not the best option for everyone who has financial difficulties.
Last Updated on Wednesday, 22 December 2010 05:42