It's amazing how many people get confused between a second mortgage and a home equity loan. For all intents and purposes they are one and the same.

The amount that can be borrowed on a second mortgage is based on the difference between your home's current value and the outstanding principal balance on your first mortgage - this is known as your 'equity' - starting to sound familiar? Additionally in the U.S. the interest paid on a second mortgage is normally tax deductible.

So why the confusion? Well, its the 'amount' that the loan is taken out for. The main difference is that a home equity loan can also be used like a line of credit. You can borrow as much or as little as you want up to the agreed amount between you and the lender. The second mortgage on the other hand, is for an agreed amount at the outset.

Second Mortgage and Home Equity Facts

A major similarity between a second mortgage and a home equity loan is the necessity for a good credit standing. The reason is that a second mortgage and/or a home equity loan results on a second lien over the property. This means that if you default on your first mortgage the first lender can foreclose and the 'balance' of the sale proceeds is paid to the second lien holder - in other words the 'credit risk' is higher. Depending on the circumstances properties can have more than two mortgages.

To make matters even more confusing second mortgages are also commonly referred to as home equity line of credit, home improvement loan and debt consolidation loans!

One key fact that is often overlooked is that second mortgages/home equity loans qualify for tax relief. This is both good and bad. The tax relief can prompt home owners to borrow more than they would previously have - so it's not necessarily prudent. In addition in a market where house prices are falling this is usually accompanied by a recession and higher risk of unemployment can leave home owners exposed to foreclosure.

You also don't have to borrow the entire amount of equity in the home, if you only need $10,000, and you have $50,000 in equity available then you still have 'reserve of $40,000' that you will not pay interest on.

So what can a home equity loan be used for?

Well, that's up to the borrower. Think of it like this - if you already have two good cars and you'd like another spare one - even if there are only two drivers - this may not be the 'most sensible' use of the money. However if you're looking at consolidating some expensive credit and then paying off the balance of the home equity quickly that is a better use of your resources!

Repayment

A second mortgage can release cash to reduce or eliminate high payments on the non-mortgage debt and with the increase in tax savings can reduce your monthly payment of debt. However these savings can be offset by a higher mortgage insurance premium (reflecting the perceived increased risk to the lender) and a smaller reduction in debt over the duration of the loan. The secret to successfully taking out a second mortgage is to 'over pay' if you can!

There are plenty of repayment options available to the borrower including interest only payments and annual payments. One note of caution, though, if the borrower is looking at relocation in the near future then pre payment charges will bury any savings - so think of this as much longer term to get the most benefit.

Conclusion

The key issue in getting a second mortgage is the amount of equity you have in your home. A second mortgage is a secured loan which means that this should be an easier loan to get, as long as the borrowers credit score is good. A real bonus is that the interest paid on a second mortgage is in most cases tax deductible. A second mortgage can be a good solution for obtaining funds for school tuition, home repairs and renovations, however it's important to remember that a second mortgage is based on your home's equity and you are putting your home up as collateral. So if something goes wrong - you lose your home and you only have to read in the Press that it does happen!

Yesterday an US housing official said that the US mortgage default rates is stabilizing. The housing official also said that she never expected that the cut in the US mortgage interest rates last week would turnout to be so important and affect the number of defaults so aggressively.

Darlene Williams, assistant secretary of US Housing and Urban Development said that it has already been made clear that the authorities are moving forward to support the nation's economy when the last week Federal Reserve unexpectedly cut down half point of its key interest rate.

The main matter of concern has been the few specific segments of the credit markets which have become stagnant as the lenders and the investors are scared that they may not get the money back because of the increase in defaults on mortgage loans. The lenders, banks and investors are taking their hands out or this, especially because of the sub prime borrowers with poor credit records.

Uncertainties over the tightening credit disturbed the stock markets all over the world during the month of August and carried into September. The Dow Jones industrial average, which closed at a record 14,000.41 on July 19th, fell down by 8.2 percent during the middle of August. The index again went up and bounced back 3.1 percent after the interest rate cut by Federal Reserve on last Tuesday, September 18.

Williams hopes that the Federal Reserve's interest rate cut would give some indication to the public that the government is worried and is trying to find out some reasonable solutions, so that the market can relax. She ensured that the market is correcting, but she also said not to expect any dramatic changes in the rate of defaults. She says that the economic fundamentals are comparatively strong now. The loan defaults are almost half of what they were during the 1980s and the interest rates are also very low compared to what it was during the 1980s.

Williams think that even though the current crisis in the credit market the sub prime mortgages must stay as they play a very important role in increasing home ownership in United States. She added that not all the sub prime loans end up with foreclosure. Almost 5 percent of the entire US mortgages are sub prime and only one fifth of those sub prime mortgages are under the risk of default. She hoped that the US congress will pass Federal Housing Administration, reforms to expand federal backing of mortgages.

The reform would allow the FHA, which insures mortgages for low- and middle-income borrowers, to back refinanced loans for tens of thousands of borrowers default on payments because their mortgages have reset to higher rates from low initial levels.

The government is all set to put on efforts to encourage financial literacy, and it is taking every step to stop predatory loans that target low-income or minority borrowers. Since most people with unaffordable sub prime loans never go to a counsellor and many did not even read the contract, the Government feels the need to encourage these financial literacy and counselling programs to avoid such problems.

It's 2007 and the mortgage industry is in disarray. The fed just lowered interest rates again and there have been many restrictions put on mortgage lenders. Hopefully you are not one of the few who got stuck in an ARM (adjustable rate mortgage) but if you are now would be an ideal time to refinance and get into a new and more structured loan type.

Refinancing is a type of financial loan you can use to pay off an existing loan. The money you borrow from a refinancing loan, you use it to close an on-going loan. Mortgage refinancing is simply a secured loan on the same property on which you have an existing mortgage loan. By mortgage refinancing, you can use the money from this new loan to pay off the previous mortgage loan.

But with this simple definition, you cannot guess what a mortgage refinancing can actually do for you. The wide range of amazing advantages of mortgage refinancing will definitely surprise you. Just take a look at some basic points.

1. The first and the most helpful advantage of mortgage refinancing is that, it will lower your monthly payment.

For example, suppose that you have taken a home mortgage loan with a 4% interest rate. But if you can lower that interest rate to 2% or even to 3%, it will be a considerable saving for you. Because, as the interest rate lowers, so the total amount of payment also decreases, this on the whole lessens your monthly payment.

2. Along with lowering your monthly payment, another important advantage of mortgage refinancing is that, it can shorten the tenure period of the loan.

For example, you have a mortgage with a tenure period of 30 years. But now, considering your future financial condition, and economic stability, it seems to you that paying the same amount each month for as long as 30 years will not be possible for you. Now, by a mortgage-refinancing loan, you can transfer the tenure duration of your existing mortgage from 30 years to 15 years, or even to 10 years. This will definitely ensure your future security more prominently.

3. Another advantage of mortgage refinancing is that, it provides you a chance to shift from a FRM to ARM or vise versa.

Typically, Fixed Rate Mortgages (FRMs) are applicable when the current market interest rate is very high. Even with a future security for monthly payments, a FRM is best option. Whereas, Adjustable Rate Mortgages (ARMs) are most appropriate when the current market interest rate is low, or in the case the future security for the monthly payment is uncertain. By mortgage refinancing, you can transfer your FRM anytime to an ARM by just refinancing the previous FRM loan with an ARM refinance loan.

4. Another big advantage of mortgage refinancing comes with the cash-out refinancing option.

Sometimes you pay according to the old estimated equity value of your home and thus loosing more money. On paying the amount for the first mortgage, you sometimes pay off such an amount that enables you to re-borrow on that principal. With a mortgage refinancing, you can simply refresh the equity of your home, and use the actual value of your home to save money. A mortgage refinancing in this case, offers you more money than the current principal balance and thus some extra cash to spend.

5. Mortgage refinancing can also be helpful for debt management. You can use the equity value of your home by cash out refinancing to get rid from debts. As a large mortgage is tax deductible, unlike credit cards, it becomes an extra benefit for you. By this way, you will save money and pay off your debts simultaneously.

6. Last, but not the least, another advantage of mortgage refinancing is that it provides an opportunity to turn off a Private Mortgage Insurance (PMI) payment.

These are a few but not all the advantages of mortgage refinancing. Mortgage refinancing is thus definitely a way out from the burden of high monthly payments or an arm loan. But whenever you consider refinancing the mortgage, scan your personal financial situation and the market rates and then consult with various lenders and compare different quotes. Then, choose the best option to avail the real advantages of mortgage refinancing.

With the turmoil in the mortgage industry all over the news, many homeowners are contemplating whether it’s still safe to refinance their mortgage. The mortgage industry isn’t as dead as the media is trying to portray. Yes, lenders are cracking down on their criteria for borrowers; but with decent credit and a reasonable amount of equity in your home, refinancing can often create huge savings just in time for the holidays.

Borrowers must be aware that, if done incorrectly, refinancing could actually end up costing you a substantial amount of money. To help you avoid the mistakes that other borrowers often make, we've compiled a list of some common mistakes that you should avoid at all costs:

Failing to choose the best refinance program.
The loan that's best for you will depend upon your unique circumstances. For example, in some cases a 15-year term may be better than a 30-year term, depending on your situation. Be sure to use our "Am I Better Off Refinancing?" calculator to help you decide whether refinancing is worth your while.

Not performing a 'break-even' analysis.
Remember, refinancing creates a brand new mortgage loan. In order for refinancing to make sense financially, you need to know how long it will take until you begin making back the fees involved with refinancing. A break-even analysis will give you this information. It's achieved by following this simple calculation: divide the total cost of the new loan (fees, closing costs, etc.) by the monthly savings off of your current payment. This will give you the number of months that you'll need to stay in the property in order to break even on your refinancing costs.

For example, if your total refinance costs were $1,000 and your new monthly payment is $50 less than your old one, then you'll break even in 20 months after refinancing. If you’re planning to move before you expect to break even, refinancing may not be your best option. Instead, you may want to consider taking out a home equity loan instead.

Paying too much for Mortgage Insurance.
Private mortgage insurance, or PMI, is protection for the lender in case you default on your mortgage. It can tack on hundreds of dollars extra on your payment each month. However, PMI isn't typically required if you have at least a 20% equity stake in your home. If you refinance less than 80% of your home's value (LTV - loan-to-value), you shouldn't be paying for PMI. If at all possible, cap your refinance amount below that amount to ensure that you find the best loan.

Fixed-rate versus ARM.
Refinancing is often viewed only in terms of a new fixed-rate loan. But in some cases an adjustable-rate mortgage can actually save you money – even if interest rates continue to rise. Again, it depends on your particular situation and the rate that you qualify for so be sure to thoroughly discuss your options with one of our lenders to find out if an ARM is the right option for you.

Not shopping around for refinance lenders.
Many people refinance with their current lender simply for the sake of convenience. This can often be their biggest mistake, as shopping around for free refinance quotes can mean HUGE savings in the long run as your current lender may not have the best rates like they advertise.

You should carefully weight the savings you can earn by refinancing against the possible costs or penalties. Any homeowner can refinance their mortgage; the key is to weight your options to determine if refinancing is the best option for your situation.