If you’ve been in your home for a while, chances are the value has increased or at least held steady over time as your outstanding mortgage balance has gone down. That creates equity that you can tap through a second mortgage.
Understanding if a Second Mortgage Is Right for You
Even though you may be able to do a second mortgage, when does one really make sense in your life?
Before we can answer that question, let’s define a couple of terms.
What Is Home Equity?
Buying a house means paying down your mortgage balance a little bit every month and seeing the value of your house (hopefully) grow over time. The ever-widening gap between the two is yours to keep. That is what’s known as equity.
What Is a Second Mortgage?
“Second mortgage” is really just a blanket term for either a home equity loan or a home equity line of credit (HELOC).
This kind of loan is considered secondary to your primary loan, which was used to purchase your home. Taking out a second mortgage typically involves getting a reappraisal of your home’s value to qualify.
When Does It Make Sense?
Money expert Clark Howard has a hard and fast rule when a second mortgage is a good idea.
“Use a second mortgage to improve your home,” Clark says. “That’s the ONLY reason to get one.”
By following this rule, you’ll resist the temptation to treat your home like an ATM that you withdraw cash from.
Of course, Clark’s rule means no drawing on your home’s equity to access money for a fancy vacation or to buy a new car.
And never ever EVER take money out to pay off credit card debt. Credit card debt is unsecured debt. If you don’t pay your credit card bill, there’s nothing a credit card company can do other than ruin your credit and/or harass you endlessly to pay your bills.
But mortgage debt is secured by your home. If you fail to keep up with your monthly mortgage payments, you could find yourself out on the street.
Finally, if you get a second mortgage that causes your loan to value to increase substantially, and there is another massive crash in housing values like there was in the late 2000’s, you could wind up “upside down” in your home — where you owe more than the home is worth and can’t sell if you need to move for work or personal reasons.
