Second mortgages or equity loans can serve several purposes. You can renovate your house, pay off debt, or even refinance to take out an education loan.

If your debt is eating up a big percentage of your income, you may need some debt restructuring. One way to restructure and consolidate debt is to take out a second mortgage—or home equity loan—on your home. Applying for a home equity loan is much easier than the process you underwent in applying for your original mortgage. To qualify for a home equity loan, your credit must be in good standing and you must be able to document your income. Beware of zero- or no-equity loans, which enable you to borrow up to 125 percent of your home's value. Such loans have higher interest rates and tighter qualifying standards.
There are two main types of second mortgages:

1. Home equity loans
2. Home equity lines of credit

Home Equity Loans
A home equity loan is a lump-sum loan and is generally amortized like most first mortgage loans. The difference is that the home equity loan is a second loan against your home behind the first mortgage that you already have. The closing costs for a second mortgage are lower than closing costs on a first mortgage loan. The rates on home equity loans are fixed rates that are slightly higher than fixed rates on first mortgages.

Home equity lines of credit (HELOC)
A line of equity is similar to a home equity loan. There are some differences that make a difference:

• Variable rate On a home equity line of credit the interest rate is can fluctuate from month to month. This makes the home equity line of credit appealing when interest rates are low, but risky when interest rates increase.



• Continual use You can use the account as long as there funds. This kind of home equity line of credit is similar to a credit card, where you have a balance and available credit line.



• Future amortization At some predetermined period (5, 10, or sometimes 20 years) you will no longer be able to draw against the account. At this point you will be required to pay off the loan, making monthly payments on the principal and the interest.

Both loan types can be effective in reducing your overall debt. Another benefit of a second mortgage or home equity loan is that you can deduct this interest on your taxes. However, don't be too quick to decide that this is the best solution for you. You probably don't want to deplete all of the equity in your home just to reduce your monthly bills. Be careful if the combination of both the second mortgage and your first mortgage goes beyond 90 or 95 percent of the value of your home. You don't want to be in a position where the sale of your house does not cover the debt that you owe plus real estate fees.

Remember, if you cannot make your second mortgage or home equity loan payments, you could end up losing your home.

When is a Good Time To Refinance?
The old rule of thumb was that you should refinance only if the rate is at least one percent lower than your current rate; but in these times of "no- or low-cost" refinance loans, you may decide that refinancing is in your best interest. If you are halfway through your mortgage term, it's probably not in your favor to refinance because you are now paying more in principle than interest.

Why should you refinance? Let's take an example: Say that you purchased your $150,000 home three years ago with a 30-year mortgage at 7.5 percent annual percentage rate (also including $2,000 per year in property taxes and $400 per year in homeowners insurance). Your monthly payment would equal $1,249:

• Principle and Interest = $1,049
• Taxes and Insurance = $200

Now, consider refinancing the $145,382 principle balance today at 6.0 percent annual percentage rate for 30 years, the monthly payment would go down to $1,072:

• Principle and Interest = $872
• Taxes and Insurance = $200

If you stayed in your home for the next 30 years, you would save over $50,000 in interest payments. In this example you have extended your loan term an extra three years; you may use all (or part) of the monthly savings to pay down the principle; doing so would reduce your time-frame on paying the loan.

You do not necessarily need to refinance with a 30-year mortgage loan; you can refinance with a 15-, 20-, or 25-year loan. The interest rate on a 15-year loan is usually 0.5 percent less than a 30-year loan, and the 20- and 25-year loans about the same as a 30-year. But, you would be shortening your time in paying the loan.