10 Mistakes to Avoid with Second Mortgages

Borrowers tend to make the same common mistakes when taking out fixed rate second mortgages. Here are ten things you want to avoid when you get your loan.

1. Not knowing the difference between home equity loans and HELOCs. Fixed rate second mortgages are nearly synonymous with home equity loans, which are also fixed-rate second mortgage loans that are secured against your home. However, HELOCs, or home equity lines of credit, are an entirely different type of loan. HELOCs are adjustable-rate loans that are intended to pay for periodic and indefinite expenses.
2. Taking out a large credit line. If you opt for a line of credit instead of fixed rate second mortgages, be careful not to take out too much credit. This will count against you when you apply for other loans and lines of credit and could get you denied.
3. Not doing enough comparison shopping. Getting fixed rate second mortgages from a bank just because you have a checking account there might be convenient, but it probably not the best deal out there. If you really want the best loan for you, you should get at least two or three different quotes on fixed rate second mortgages from various lenders.
4. Not asking for a Good Faith Estimate (GFE). Legally, your lender must provide you with a Good Faith Estimate of the fees involved within a few days after you apply for fixed rate second mortgages. A GFE can help you be sure you're not paying hidden fees and charges.
5. Assuming a second rate mortgage always costs less. Fixed rate second mortgages usually cost less than using a credit card but not always. You need to compare interest rates and factor in the tax deduction that typically comes with a mortgage loan.
6. Getting a second mortgage when you plan to refinance. You might not be able to refinance primary mortgages if you already have fixed rate second mortgages on the property. If you do refinance, you might not be able to keep the second mortgage.
7. Being unaware of the tax benefits. Most fixed rate second mortgages will qualify you for a tax deduction on the interest. Check with a CPA or other tax advisor for this information instead of the lender.
8. Using a HELOC to pay off credit card debt. If you take out a HELOC to pay off your credit cards, make sure you don't use the entire credit limit of the loan to do so. You might find it difficult later on to make the payments, thereby risking losing your home.
9. Not knowing the prepayment penalty. Most fixed rate second mortgages come with a prepayment penalty that can be substantial. Find this information out ahead of time.
10. Being unaware of the life cap. HELOCs usually have life caps, which allow the interest rate to go up much higher than expected. Try to use your HELOC before this sets in.

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