Second Mortgage: Borrowing Against Your Home for the Business
A second mortgage avails you the opportunity to borrow against your house, which is an asset that continually increases in value and worth as time goes on. They are the Home Equity Line of Credit, or HELOC, and home equity loans. They are usually used as finance sources for your business, which may not necessarily require you to sell your house.
A second mortgage essentially uses your home as a kind of collateral. Because the purchase loan is first to be repaid if your house gets to the foreclosure phase, it is called a second mortgage.
There are two main kinds. A lump-sum loan is a one-time home equity loan that gives you a lump sum of money to use as a source of funds for a particular project. Repayment is made in installments, and every payment made has its interest attached, with a portion going to the balance of the loan. With a line of credit, the lender sets a limit to the amount you can borrow, and you can continue to borrow until you reach that limit.
The advantages: loan amount, because when you use your home as collateral you can access more funds than with some other collateral; interest rates, because second mortgages usually have lower interest rates than other loans, as you borrow against your own home; and benefits on tax, because in some cases you can take mortgage interest deductions, though you should ask tax preparers and get familiar with the technicalities before you know what you are getting into.
The disadvantages: risk, because the major demerit is that you are putting your home at risk. The moment you stop making payments, you begin to lose your home, and it can in turn affect your family. Interest costs: the rate is relatively lower than that of credit cards but higher than first-loan rates. Loan costs: second mortgages take up appraisal and organization fees and other things, making them very expensive.