Using a Second Mortgage for a Home Improvement Loan

You can use the equity you have built in your home for a second mortgage home improvement loan. This is called a second mortgage because you are placing the deed to your home down as collateral. If you default for any reason, just like with your mortgage, you risk losing your home. There are many advantages to seeking a second mortgage for home improvement that may offset this risk, however.

Increase the Resale Value of Your Home

One reason to seek a second mortgage is to ultimately increase the value of your home. Improvements made to the plumbing, electric, roofing or windows nearly always pay off in the end. Fixing the facade, fixtures, landscaping and other aesthetic changes can also make a big difference. Consult with a real estate expert before making changes to increase your home value. Some changes will not pay off, and it is possible to out price the intrinsic value of your home in its current neighborhood or lot.

Enjoy Your Home More

Even if your home improvements will not bring you more money in the end, they may bring you more enjoyment. This type of home improvement is a good investment only if you will be in your home for a long time. Changes such as home theaters, hot tubs or game rooms are often strictly for the enjoyment of the home owner. There is no telling whether the next potential buyer will like these upgrades.

Secure a Loan with Poor Credit

Seeking a second mortgage in order to finance the changes you are making will allow you to get a loan without perfect credit. This is called a secure home improvement loan because you are offering collateral. With an unsecured home improvement loan, you offer no collateral. To get an unsecured loan, you will need to have a nearly flawless credit history. If you have a few bumps in your credit score, mortgaging your existing equity may be the only option to provide you with the flexibility to make improvements.

Use Your Assets to Grow Your Liquidity

For many people, the large majority of their net worth lies in their home equity. If you do not have a lot of cash on hand, you can use that equity to grow your financial liquidity. This is particularly useful at times when credit are tight. For example, many lenders tightened up their standards following the housing market crash in late 2007 and 2008. This made cash hard to come by. Monetizing a valuable asset like your home can loosen the lender's wallet.

Get a Lower Interest Rate

The main reason people opt for second mortgages rather than unsecured home improvement loans is for the lower interest rates. With a second mortgage, you are assuming the risk in case of default, not the lender. This means you will pay less for the loan over time. The lower interest rate is worth the risk for people who have an emergency fund or other support to fall back on in case of financial catastrophe. Once you have made the improvements and paid off your second mortgage, you will have grown both your equity and your credit score.