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Second Mortgage Home Equity May Require Personal Mortgage Insurance (PMI) Staff - Mortgage Lenders Plus.com

If you have been a home owner over the last few years and seen the houses in your neighborhood sell for well over what you paid for yours, the chances are that you have substantial equity in your house. You have paid down a portion of your mortgage, and homes in the neighborhood are selling at a higher price, then you have developed equity in your home. The term simply refers to the difference between what you owe on the property and what it is worth on today’s market.

If that difference is substantial, you might want to consider converting your equity into cash through the use of a second mortgage. A home equity loan is the same thing as a second mortgage; you are taking out a loan using the new value in your home as collateral. Second mortgages for home equity have become a popular source of cash among home owners over the last several years as home values have shot up.

A second mortgage based on home equity functions much the same as your primary mortgage. Usually these loans are for a shorter term – ten or fifteen years, or some other period of time that works with your financial plans. The loans typically are fixed rate notes and are set at a couple of percentage points higher than what might be available for a fixed rate first mortgage for a thirty year term.

Second mortgage home equity loans are going to have many of the same costs attached to them as first mortgages do. There will be loan origination costs and fees, along with a new appraisal fee and some of the other costs that seem to pile up when loans are closed. The interest that you pay on your second mortgage is tax deductible, just as with a primary mortgage. If you choose to gamble on a second mortgage that amounts to more than the value of the house, interest paid on borrowed money over and above the value of the house is not tax deductible.

You need to consider the costs of obtaining the loan in calculating its value, and you also need to look at the question of whether a second mortgage home equity loan will require you to obtain personal mortgage insurance (PMI). Lenders on primary mortgages require this insurance of borrowers that make a down payment of less than 20%. With the addition of new debt, you should ask your primary lender if the second mortgage against home equity will force you to take out PMI – which can be a substantial additional monthly payment.