Second mortgage interest refers to either the interest rate or the amount of interest paid on money borrowed in the form of a second mortgage. In a second mortgage, a borrower takes all or a portion of the equity from his home in the form of a loan. This is often done for the purpose of paying off high-interest debt such as credit card debt, or for making improvements to a home. The interest rate on a second mortgage is almost always significantly higher than that of a first mortgage.
Some of the parameters of second mortgages are similar to those of first mortgages. For instance, second mortgage interest rates, if they are fixed, will remain constant throughout the term of the loan. If the second mortgage interest rate is adjustable, the rate will change at regular intervals. The differences can make a huge impact on the borrower, however. The amount of time the borrower has to repay the loan is usually shorter than in the case of first mortgages. This is because a second loan represents a higher risk to the lender.
This higher risk also means that second mortgage interest rates are higher. The additional risk comes from the fact that if the loan goes into default, the balance of the first mortgage gets paid off before the second mortgage. In the case of most home foreclosures, this means that the second mortgage is left completely unpaid. To compensate for the times that this happens, lenders of second mortgages charge higher interest rates for the privilege of borrowing the higher-risk money.
The interest one pays on a first mortgage is tax-deductible. Second mortgage interest is also tax-deductible, but is governed by additional tax guidelines. If you use a second mortgage to build or improve a home, this is known as home acquisition debt for tax purposes. For home acquisition debt, you can take a tax deduction for the interest as long as the total debt from first and second mortgages does not exceed $1 million US Dollars (USD). This limit drops to around $500,000 USD if the borrower is married and files a tax return separately from his spouse.
If the second mortgage is not used to acquire, build, or improve a home, it is known as home equity debt, and only the interest for the first $100,000 USD is deductible. Again, this number gets reduced by half to $50,000 USD if the borrower is married and filing separately. Since tax laws are subject to change and revision, it is best to speak with a tax accountant to get assistance with potentially complicated tax deductions.