Using home equity to obtain a second mortgage has certain advantages, but it is serious business. Understanding the implications of a second mortgage starts with asking the right questions

Second mortgage can be relatively easy to obtain and carry a lower interest rates than other types of consumer financing.. On the other hand, a second mortgage means you are putting your house up as collateral, so you need to fully understand what you are doing. The following are some questions that might help:    

• Does the project fit my budget?

Just because you have home equity available as collateral for a second mortgage doesn't mean you have the cash flow to make the monthly payments. Many second mortgage lenders offer payment calculators that help you figure out what a monthly payment might be. Use these tools to budget before you borrow.

• What are my spending priorities?

Since it will probably take years to pay off a second mortgage, you have to ask yourself whether the proposed project is the highest priority you are likely to face in the next few years. Make a list of anticipated projects and expenses and then prioritize them to determine which are most deserving of a second mortgage.

• Does the project fit the length of the loan?

As a rule of thumb, don't use long-term debt to finance short-term spending. This is why projects with lasting value, such as home improvement, are better suited to second mortgages than things like vacations.

• Are alternative forms of financing available?

While a second mortgage can be a relatively cheap form of debt, you might find terms as good or better on other types of debt for things like car loans or college tuition. If you can get terms that are as good or better without putting up your house as collateral you can make the loan less risky.    

• Do I need a fixed loan or a line of credit?

A conventional second mortgage makes sense if you are borrowing for a large single project, but if you anticipate a series of smaller projects over time, consider a more flexible home equity line of credit.

• Am I getting the best deal available?

Once you have decided that a second mortgage is appropriate, compare rates and terms from multiple second mortgage lenders. If the loan amount is large even seemingly small differences can save you a great deal over the life of the loan.

• Would I be better off waiting for a better time to get a second mortgage?

If you have some flexibility in the timing of your loan, consider whether this is the best time. For example, if second mortgage interest rates are relatively low, you may want to act as quickly as possible. On the other hand, if your credit is bad, you may want to improve it before you apply for a loan. Talking to second mortgage lenders can give you a feel for which factors might affect your ability to get approved and the interest rate you receive.