Second mortgages and home loans are among the most popular ways for homeowners to get extra cash for important life events. Also known as home equity loans, second mortgages allow you to borrow money "against the equity in your home". The concept sounds simple enough, but there are things that you should understand about second mortgages before you agree to take one out.

A second mortgage uses your home as collateral.

Ads for second mortgages don't always make it clear that they are secured loans. That may sound good, but the security isn't for you - it's for the bank. When you take out a second mortgage, you are promising the lender that if you can't make the payments; they can get their money back by selling your house. That is the single most important thing you need to understand about second mortgages. If you default on a second mortgage, you CAN lose your home.

There are good and bad reasons to take out a second mortgage.

Those same ads also often use tempting images to convince you that taking out a second mortgage for fun things is a good idea. Why wait for that cruise when you can put your house on the line to finance it? It's best to use savings and earnings for fun things and luxuries. A second mortgage is a great way to fund things that will last and give you a return on your investment. Among the best reasons for a second mortgage are

• paying for education and training


Education and training can make an enormous difference in your life or the lives of your children. Borrowing money to allow you to change your life for the better is a good investment.

• making improvements or repairs to your home


Increasing the value of your home is another excellent reason for taking out a second mortgage on your property. This holds true whether you are making improvements and repairs in order to make your house more marketable, or simply to increase your own enjoyment of it. In either case, you're using borrowed money to increase your own wealth, one of the best reasons for borrowing.

• paying for once in a lifetime events


A wedding can set you back by tens of thousands of dollars. If you can find a second mortgage with payments that fit your monthly budget, taking out a loan against your home can allow you to pay for important lifetime events that you can't pay for all at once. A better choice for this kind of purpose may be a home equity line of credit, though.

The amount that you can borrow is determined by the amount of equity you have.

The equity you have in your home is the difference between the amount that your home is worth and the amount that you still owe on your mortgage. Here's a quick example to help you understand.

Suppose you bought a house for $200,000, and put down a down payment of $20,000. The day that your mortgage closes, your home equity is the same as your down payment - $200,000 (home value) - $180,000 (amount owed on mortgage) = $20,000 (equity). Now imagine that five years have passed, and you've made your payments faithfully. You've paid down $13,000 on your mortgage, and now owe $167,000 on it. Your home's value has increased to $250,000. Your home equity is now $250,000 (home value) - $167,000 (amount owned on mortgage) = $83,000.

Depending on your credit and the housing market, you may find lenders who are willing to lend you up to 125% of your home equity, but it's more common for them to lend 60-80% of home equity. Thus, with $83,000 in equity, you may be able to borrow from $49,800 to $103,750.

The interest rate that you'll be offered is dependent on your credit rating.

As with any other loan, the interest rate on your second mortgage will depend on how good your credit rating is. The better your credit rating, the lower your interest rate will be. You can affect that interest rate by taking the time to clean up your credit before starting to look for a second mortgage.

Shopping around for second mortgage rates is always a good idea.

Don't just take the first second mortgage that you're offered, though. Every lender has different ways of factoring in credit ratings and other factors, so it's definitely to your benefit to shop around and get several loan quotes before making a decision.

It can take several weeks to get a second mortgage approval, but there are ways you can speed up the process.

One of the best things you can do in the interests of speeding up the process of loan approval is to get your own home appraisal before applying for a second mortgage. It's not foolproof, but many lenders will happily take your expert's appraisal rather than pay for one of their own.

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About Author: Brain Jenkins is a freelance writer who writes about topics pertaining to the mortgage industry such as a Mortgage Company.