Using a Second Mortgage to Finance Home Improvements

Written by: Scott Sery

There is a lot of paperwork and preparation that goes into purchasing a house.  For those who have the means to pay cash for their house, they will have a lot of paperwork; for those who have to take out a mortgage, they will have even more paperwork.  The good part is that once the initial paperwork is done, there is not much else to do other than make monthly payments.  But during the course of the next 30 years, many people will want to do upgrades or remodels to their house.  Instead of saving the money, they will often take a second house mortgage out.  This second mortgage acts very similar to the first, but there are some minor variations.  It should not, however, be confused with a mortgage on a second home.

The first mortgage is always going to be the primary mortgage on the house.  This is the one that is collateralized by the structure, and if the borrower defaults, the lender will repossess the house.  Since the first mortgage gets the house, there is no collateral left for the second mortgage making it a riskier loan for the lender.  To compensate for their added risk the lender will issue the second loan at a higher interest rate.  While the interest rate may be higher, most borrowers opt for a second mortgage of shorter duration than the first.  So in the long run, the amount paid in interest is quite a bit lower than that which is paid on the first loan.

Despite the differences, the second mortgage is still very much a mortgage.  The borrower is required to make equal payments throughout the duration of the loan.  These payments will never change, since once an interest rate is locked in, it stays locked until the debt is fulfilled.  Legally the second mortgage is treated just the same as the first mortgage.

In the event that the first mortgage is paid off before the second mortgage is paid off, the title simply switches.  The second becomes the first, or primary, and the house becomes collateral to the new primary mortgage.

Basically any loan against the house other than the first mortgage is considered a second house mortgage.  The interest is still deductible (on up to $100,000 or $1,000,000 depending on how the money was used) so the tax ramifications should be substantially equal as they are with one loan.  The borrower should understand that taking out a second mortgage should not be considered as a quick source of cash for trips and extravagant living.   Use the money from a second mortgage to make additions and remodel kitchens and bathrooms, then pay it off as quickly as possible.


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Using a Second Mortgage to Finance Home...

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