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Timing Your Second Mortgage

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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, your monthly payments 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 while.

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.

Interest Rates

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 loan.

When It Will Be Most Useful

Your CES can be used for any number of things: consolidating debt, 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.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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