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What can you do with a second mortgage, what can you not do with a second mortgage? There are so many options available for second mortgage money that we’re going to take an entire article and examine some of those options. Home improvement, college education, business ventures, even a luxury vacation is an option for your second mortgage money.

Let’s start with the more intelligent options: home improvements and college educations. Home improvements are often a necessity after several years of occupying your home; when you actually live in a home, everyday use of the home encourages wear and tear. Carpet, appliances, even the paint on the wall begins to need repair. How do you pay for that require? Operating on a fixed income does not leave room for extra repair expense, so how does the average homeowner afford such an expense? Second mortgages are the most feasible option when repairs are needed or expansion is necessary. The interest deduction on a second mortgage if the mortgage is used to increase the value of the entire home, execute repairs within the home or increase the size of the home is a completely tax-deductible interest expense.

What about college education funding? Until recently, the most affordable option for college funding and financing was the second mortgage. Over the course of the last 10 years, private student loans, increased government funding, and the increase in the nontraditional student enrollment have led to a decrease in second mortgage options as a funding option for education. It has not however completely eliminated the second mortgage is a way to pay for college education; and today many parents still find this option the more attractive, affordable, and as a whole, the least expensive option for college education funding. After all, we are simply trading an equity investment in our home, for an investment in our child’s future.

Now, let’s take a moment to talk about some of the riskier options for taking out a second mortgage or home. Sometimes, we need to take the step into business ownership; sometimes we lack the funding to take that step. The equity we’ve managed to establish in our homes is an excellent source for that funding but is it the best option for the funding? Sometimes the answers you sometimes the answer is no; at any rate it is quite often the option most exercised by would-be entrepreneurs. My suggestion here is this: if you’re taking the money to open a business that is a continuation of your business background, a business in which you have extensive experience and knowledge, then I believe you’re making a wise investment. Otherwise, I would not risk the equity and savings in my home.

Well, we looked at some of the better choices for taking a second mortgage, and we looked at some of the riskier choices for taking out second mortgages, but what about some of the just plain nonsense reasons for taking out second mortgage? What are some of those reasons? New cars, expensive vacations, or plastic surgery in my opinion would fall under nonsense reasons. But not according to the average consumer. Everyday, new cars, vacations, and plastic surgery take place at the expense of home equity savings. Or they legitimate uses of home equity in second-mortgage funding? Absolutely. Are they tax-deductible reasons? Probably not; but nonetheless, consumers use second mortgage money every day to pay for these choices.

The reasons given and listed here are but a very small few of the actual examples of consumers spending of the equity in their home. A second mortgage was a tool intended to aid the consumer and provide access to the equity in their home, equity could be used to increase the value of their home or make worthwhile contributions to their family life. And as usual, some consumers actually use the second mortgage for this reason; many consumers, don’t. The second mortgage option has become like many other options in this day in time, a fast way to spend our selves into deeper debt management.

At some point, the consumer will become ready to retire, retire to a home without a home mortgage payment. The way to accomplish this end is to build equity in a home and payoff the mortgage. That’s one thing you can’t do with as a mortgage.
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For the average consumer who has managed to acquire credit card debt, automobile loans, and various other small debts, is the second mortgage loan an answer for the consolidation of debt and a tax reduction? Quite often the answer to this question is yes. Second mortgages that have traditionally been used in areas of home improvement, funding college educations or business startups are now being considered as a means to eliminate or consolidate high-interest credit card debt and create a tax deduction at the same time.

For the average consumer, using second mortgage loan money to pay off credit card debt or to consolidate individual personal loans does not eliminate the possibility of a tax reduction; especially if that average consumer does not already own a second home. The only problem here seems to be that we’re replacing credit card debt for second mortgage debt; what do we then do with the credit card we’ve paid off? The smart consumer cuts them up.

How does a second mortgage affect your tax liability at the end of the year? A lot of that will depend on your income levels, your medical expense, and your other interest deductions. Mortgage interest expense is deductible on the Schedule A “Itemized Deductions” form of your individual or personal tax return. The Schedule A, however is not a straight tax reduction tool. Tax reductions, or deductions, carried forward from the Schedule A are a percentage of your AGI, or your adjusted gross income. Your adjusted gross income is based upon your income less certain expenses and deductions from Schedule Cs, Schedule Es etc. etc. Can you now see where this might be a little complicated?

Let’s throw something else into the mix: if you’re an investor, especially in the real estate market, your mortgage interest may not be deductible, period. Mortgage interest on your first home and on your second home is a tax deductible interest; if however, you happen to be an investor in the real estate market the ability to make it clear distinction between first and second homes versus investment property becomes much harder to prove. Is the home a second home with deductible mortgage interest expense, or is it an investment? Of course, for investors interest expense on a loan for investment purposes is fully tax deductible; no percentages to work with at all.

Now let’s ask another question, if you decide to take out a second mortgage could you better invest your money? What a 401(k), an IRA, or an MSA be a better benefit when it comes tax time versus leading the money in your home as equity? This has been a question long debated by financial analysts, tax attorneys, and fairly tax proficient homeowners. How does the equity better serve the homeowner? As a savings account, which is really what the equity in your home turns out be, or as an investment tool that can be used to increase your retirement savings? There are other factors to be considered here: such as penalties for early withdrawal, risk ratio versus profitability ratios, and which programs reduce tax on a one-to-one ratio? Unless you already have some general knowledge of the tax system, it can be more expensive to determine tax savings than you would actually save.

As you can see there are many, many ways to affect your tax liability, your tax deductions, or affect a tax reduction; the correct answers are highly dependent upon the individual situation and the individual objectives. The only way to accurately determine the better benefit is to sit down with a financial advisor, your tax information, and evaluate your long-term objectives.

Does the average consumer ever take the time to accomplish this? As a general rule the answer is no. Most consumers never take the time to look past next month. Over the course of a stressful and busy work week retirement planning, tax deductions, and income producing benefits never cross the consumer’s mind. For those individuals who truly anticipate and receive benefit from tax planning in relation to their mortgage interest, there are many more individuals who never even contemplate that there might be a savings. Maybe, we should just skip this question.

Great news! You qualify for a second mortgage. Now what would you like to do with the second mortgage? It will be your answer to this question that determines whether or not your second mortgage is your friend, or your foe. That seems to be an awfully strange way to look in a second mortgage; however that’s exactly what the mortgage will be. Your friend or your foe.

How do you even qualify for a second mortgage, what is a second mortgage, and why would you want a second mortgage? Well, the answers here are as varied as the consumers who apply for such mortgages. Many times consumers need a second mortgage to make improvements on their home. Many times consumers need a second mortgage to put their child to college. And sometimes, consumers need a second mortgage to start a business. The reasons given here for obtaining a second mortgage increase the value of the home, provide opportunity as an investment in your child’s future, or provide the opportunity to increase income. These are the original and most beneficial reasons for obtaining a second mortgage.

Are they the only reasons consumers obtain second mortgages? No. Today’s market has been a great influx of second mortgages to pay off credit card debt, to buy new car, or to simply take a vacation. Should consumers receive a second mortgage for those reasons? Absolutely. Should consumers actually ask for a second mortgage for those reasons? Absolutely not.

An educated consumer understands the consequence of a second mortgage. The educated consumer understands the price of the second mortgage. What is the price of the second mortgage? The equity in your home. When you apply for a second mortgage, you’re trading the equity in your home for cash. You’re giving up your savings.

If you’re trading your savings, in order take a step up, you’ve made the right decision. If you’re trading your savings for a frivolous expense, you’ve made the wrong decision. That’s how you determine if your second mortgage is your friend or your foe.

Today’s consumer is acquiring second mortgages that for many will prove to be their foe. They’re not increasing the value of the home; they’re not educating their children. Nor are they increasing their income earning potential, they’re simply spending their savings. Rising real estate prices, increasing availability of mortgage products, and the decline of savings for the public as a whole is creating the “bubble” effect. The bubble effect occurs when prices rise, spending rises, at a rate greater than can be supported on a long-term basis. At some point, the bubble bursts.

Your second mortgage, if used to increase the value of your home, will have insulated you against the drop in price. Your home is actually worth more; therefore, if prices drop you’re protected. This was the original intent of the second mortgage; to provide the consumer with easy access to the savings accumulated in their home for home improvements, emergency events, or in order to better their homes or lives. You know for the most part consumers do not save money in a savings account; consumers only save money when they aren’t aware that they’re saving money. Home equity was one of the last hidden ways consumers were saving. Second mortgages and other loan mortgage products have managed to eliminate those savings as well. Has the consumer stop to contemplate the consequence of negative saving? Absolutely not, and our current system of mortgage lending encourages negative savings.

Second mortgages are a great way to access your savings and increase your income tax deductions; they are one of the greatest tools available for financial planning and beneficial consumer spending. They are also the fastest way to spend yourself in to debt under socially acceptable circumstances. Many consumers receive offers for credit card debt consolidation and financial analysis. There are never any offers to counsel the consumer concerning their choice in mortgage products, the option of second mortgages, or the consequence of those choices. Your decision to and a second mortgage can be one of the best decisions you’ve ever made or your decision can be one based on folly and frivolous spending. Now, your second mortgage, is it your friend or your foe?