Tapping Your Home Equity for a Second Loan
One reason tapping your home equity for a second loan can be an attractive financial option for the borrower is that lenders consider these loans a good risk even for borrowers with bad credit. It's easier to qualify for a second loan on home equity than it is to qualify for other types of loans. Lenders logically believe that even loan applicants with low credit scores are likelier to make timely repayments when their home is the collateral.
Attractive interest rates on second home equity loans
For borrowers with a solid credit score, a second loan on home equity can still make good financial sense. Although the interest rate you'll be able to get on a second home equity loan is likely to be higher than the interest rate on your original mortgage, it will still be less than the interest rate carried on other debt, such as credit card debt, student loans or unsecured personal loans. In addition, loans taken out against home equity are almost always issued at a fixed interest rate, making your financial planning, budgeting and organization a lot easier.
Using a second home equity loan to consolidate high interest debts at lower rates
Because these loans carry lower interest rates, many people find a second home equity loan an appealing alternative to a debt consolidation loan. The interest rates for loans secured by home equity are more manageable than rates offered by debt consolidation loans, and, depending upon the amount of equity interest, the borrower should be able to qualify to borrow a larger amount of money than they would with a debt consolidation loan application. They can then use the money from the second home equity loan to settle their existing debt, eliminating those high interest rates and late payment penalties along with the debt, while repaying the home equity loan at a reasonable, fixed rate.
A second loan on home equity can help finance common major expenditures
Sooner or later many homeowners find themselves with substantial life expenses such as college tuition, home renovation, or unforeseen medical costs. They may wish to finance a vacation, or the purchase of a second home. Even in difficult economic times, home equity still offers a lot of value to borrow against when you need to borrow a significant amount of money. The lower interest rates often make it a more economical means of financing major expenses than using credit cards or an unsecured personal loan.
Points to remember before taking out a second loan on your home equity
Do your research and choose a reputable lender - preferably a lender with a good word of mouth reputation in your community, or a lender recommended by friends or family. Don't deal with a lender who uses pressure tactics or recommends a loan amount that exceeds your financial comfort level. And be certain you can afford to make your repayments on time. When your home is on the line, there's much more at risk than late payment penalties and potential damage to your credit score if you miss your loan payments.