Second Home Loans

Typically, second home loans are mortgages, in addition to the first loan, taken out by homeowners against equity in their property. Equity is the difference between the market value of residences less the loan balance. For example, if the value of a house is $550,000 on today's market and the owners owe the bank $150,000, the equity, or interest in the property is $400,000. Homeowners can borrow or take out a second mortgage for all or part of the equity to make repairs or improvements, such as building a new room addition, garage or patio; pay for a child's college education; or save money for retirement. Loans can be also be extended as a line of credit. But second mortgages loans are usually financed at a higher interest rate than first mortgages and must be paid off within shorter terms. While it may be tempting, most borrowers refrain from taking hefty equity loans, simply because payments for two mortgages outweigh the benefits of access to a ready source of cash.

While second home loans can come in handy, if principle and interest amounts add up to an exorbitant monthly payment, borrowers may turn to other financing strategies. Sellers who want to make improvements before putting residences up for sale need to be aware that lenders will usually not grant home equity loans for property currently listed on the market. Mortgage brokers may recommend obtaining an equity loan several months prior to listing residences to avoid jeopardizing the chances of financing. Borrowers should remember that real estate professionals are adept at helping homeowners maneuver through complicated transactions and make wise choices. Those who receive sound advice can avoid making financial mistakes that will be deeply regretted in the future. "Hear counsel, and receive instruction, that thou mayest be wise in thy latter end. There are many devices in a man's heart; nevertheless the counsel of the Lord, that shall stand" (Proverbs 19:20-21). One drawback to taking equity out of the home is that potential buyers may balk at dealing with sellers who are carrying more than one loan. Logically, sellers obligated to two mortgages may have a tendency to price property than what it is actually worth to pay off creditors. Those higher prices could deter serious buyers and leave little bargaining power at the negotiating table.

When it comes to why borrowers opt for additional mortgages, the reasons for taking out second home loans are as varied as individual homeowners. Some want to pay off delinquent debts, purchase new furniture, pay for college expenses, or go on a dream vacation. But, money management gurus will recommend foregoing high-interest, long-term loans to finance frivolous purchases or fun adventures. If consumers don't want to wind up paying for a new car or a trip to sunny Hawaii for the next fifteen years, they need to reconsider motives for financing second home loans. On the other hand, if an equity loan is the only way parents can send junior off to college, then it's a good investment. Instead of depleting hard earned savings for books and tuition, a home equity loan can be spread evenly from month to month. That additional mortgage may actually be a better alternative than financing higher education through a conventional student loan. Of course, borrowers should check with local banks and online lenders to compare rates and terms for the best college financing.

Managing money is serious business with serious consequences. Borrowers should never take on more debt than they can safely handle. Second home loans can be a gamble against a waning economy and sluggish housing market. If two mortgages get too hot to handle, homeowners and lenders could wind up losing! Banks, credit unions, and mortgage lenders who extend credit for second home equity loans want to make sure that borrowers are able to repay mortgages without default; but life can be uncertain. Good people undergo life changing and challenging situations that can rob them of financial solvency. If chronic illness, job loss, or a spouse's death disrupts monthly cash flow, homeowners could find themselves facing foreclosure. Consequently, lenders of second home loans could easily find themselves in the precarious position of having to make good on a delinquent borrower's first note in order to protect their investment. Financial institutions may be forced to pay off original loan balances in order to keep investments from heading to the auction block; but borrowers can easily lose hundreds of thousands of dollars invested over the years.

Before considering second home loans, borrowers would do well to investigate less expensive options. Moonlighting at a part time job rather than taking equity out of the property might be a way to pay off lingering, delinquent bills. Students can start a college savings fund by socking away money from after school jobs, generous relatives, or short-term savings accounts, such as high yield money markets, certificates of deposit, or Treasury bills. And that trip to an exotic isle may just have to wait until Mom and Dad retire with a mortgage-free home. The best deterrent to incurring more indebtedness is to sit down with bankers or lien holders and assess whether taking out second home loans can be a blessing or a curse. Honest consumers will admit that spending money for expensive vacations, new automobiles, or recreational vehicles may have to be put on hold until the family's finances take an upturn. In the final analysis, if high interest rates and hefty principle payments overburden cash-strapped borrowers, refinancing may present a better option. Taking out loans with lower interest rates to consolidate and pay off charge card accounts, make home improvements, or take a weekend trek out of town are wiser choices than incurring additional long-term debt for frivolous expenditures.

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