Taking out a second
mortgage is not a decision you just jump into. A lot of careful planning and
thought should go into it, as you are taking a pretty big risk: one that could
damage your credit
and put you in debt for a long time if you aren't prepared. Timing is as
important as anything with this decision, since when you decide to take out your
second mortgage will determine a lot about how much you can get out of it.
Your closed-end second mortgage (CES) is valued based on
how much equity you have in your home. In the first few years of any mortgage,
are mostly going toward paying down your interest, so not much
equity is built up. Keep in mind that this will be the same with your CES. That
is, you won't be buying back the equity you borrowed against for a little
So, it's advisable to wait until you own a good portion of your
house before you borrow against it. You don't necessarily have to wait until
halfway through the payment period, but immediately taking out a second mortgage
might leave you with a lot of debt and no equity to show for it.
In most cases, the interest rate on your second
mortgage is going to be higher than your first mortgage; it is a greater risk
for your lender. The state of the housing market, however, could make your rate
much higher. It might be worth it to wait out a period of turmoil so that you
can save on your interest payments, thereby lowering the overall cost of the
When It Will Be Most Useful
Your CES can be used for any number
of things: consolidating
, making another large purchase like a car, or financing a vacation. The
most tax benefit you can get from one is for home improvements. You might
consider other avenues of paying for the former things, and wait until your
house needs an overhaul. This way, you will be using your equity to its fullest
tax benefit while adding value to your home.
Keep these three main
factors in mind when choosing when to take out a second mortgage, and you can
save yourself a lot of money.