Perhaps you’ve heard the term “Home Equity Loan.” Home equity loans and second mortgages are really the same thing. A home equity loan is a loan that is borrowed against what you already own in your home. Though just because you own 50% equity in your home doesn’t mean that you can be given that much in a home equity loan. Your debt, income and credit history will also be evaluated. Home equity loans offer tax savings due, because the interest paid on a home equity loan is tax-deductible. They’re often used to consolidate debt, to finance college educations, large vacations, home repairs or even a second home.

There are two basic types of home equity loans – a home equity line of credit and the second mortgage.

A second mortgage gives borrowers a lump sum of money that must be repaid over a designated period of time.

Here are the pros and cons of a second mortgage.

Pros:

A second mortgage is based on your home’s equity, which means that as a home owner you have the funds readily available. This can be enormously helpful if you’re looking to consolidate debt or make major repairs on your home. Many people take out a second mortgage to pay for their children’s college education.

A second mortgage is a secured loan and is generally easier to obtain than other types of loans.

The interest paid on a second mortgage is normally tax-deductible.

Cons:

Your second mortgage is being based on your home’s equity, which means you are putting your home up as collateral. If you default on your payments, the bank could take your home away from you.

Interest rates may also be higher than for your first mortgage, particularly if you have a low credit score.

There are always fees and closing costs involved in a second mortgage, which can make it a more expensive process than you’ve bargained for.

Default penalties, a factor in some second mortgages, can cause your interest rates to skyrocket and all it takes is a delay in the mail. Look for a loan without these penalties.

Some mortgages also have prepayment fees, which means if you pay off your loan early, you owe the lenders extra. Basically, they don’t want to lose the interest income they would have made if you’d taken the full term of the loan to pay it off.

Second mortgages are certainly viable options for many people. However, it is important to weigh your costs and the advantages before you begin the application process. Determine exactly what your goals are for the money, how much you plan to borrow and how you’re going to pay it back.