Some typical reasons for needing this extra money include paying for improvements to the home, or financing the education of the children. Sometimes these loans are used by people in debt to consolidate their debts into one manageable sum.
Here we come across the first potential con - with a second home loan your home is at risk. As always with debt consolidation, it is absolutely vital that the spending that is leading to debt stops as soon as the consolidation happens. A failure to arrest the debt will lead to more debt, but this time it will be different. This is because with second mortgages the borrower is using their home to secure the loan - fail on this loan and the home will be taken away!
This advice can be extended to people who are not using the loan to meet debts. Even those with good credit rating need to be absolutely sure that they are not borrowing more than they can afford to pay back, or they too could be forced to sell their home. With home equity second mortgages the important thing is to check all the terms. It is quite common for loans to be discounted for an initial term. This makes for an attractive opening repayment schedule, but there will be a whammy later on when the money to be paid month by month shoots up. Some products offer a double discount to begin with and the difference between year one and subsequent years can be significant. So be sure you know what the bigger payments are, and be sure you can meet them.
Being a second home mortgage, there is a good chance you will pay it off early - say you have financed improvements to the home, then you have sold it off. In this case you will want to pay off the debt early, so be sure you can do this without a penalty. It is not unusual to find the lender has included up to a 10% early repayment penalty, so shop around for the right deal for you.
So much for cons, here are some pros. From the perspective of the lender a loan that is guaranteed by a valuable house is much less of a risk than a loan backed by a simple written contract (an unsecured loan). Therefore you will find far better rates of interest on these second mortgages than many other types of borrowing.
The other big plus for tax payers is that the money secured against your home is tax exempted. This can make a big difference too.
The second mortgages on the market are usually home equity loans, but there is a similar product which is also a mortgage on your home, the equity line of credit. The basic difference is that with the equity loan you get an agreed sum of cash. With the equity line you can draw money as and when you need it until you reach an agreed maximum - these lines are often used by homeowners who are unclear on final amount they wish to borrow.
If you are keen on an additional mortgage, whichever product you look into, be clear about the small print with both high street and online retailers. You will find plenty of example of zero fee loans, but these typically have a fair number of exclusion clauses. To get the best deal you have to do some research and look into each deal carefully. However the right deal can be just what is needed to get the best from your home.