Should You Use a Second Mortgage to Pay Off Debt?
You face a mountain of debt, and there seems to be no end in sight. Perhaps you have more bills than you can afford to pay on your income, or maybe you have faced unexpected medical expenses. Maybe it seems as though paying off your credit cards is an unattainable dream. Is there any way out? You wonder if it would it be wise to use a second mortgage to pay off your debt.
Actually, experts agree that using a second mortgage to pay off debt can be a very good idea for some people. It can be very bad for others, however, and the answer may depend of the individual circumstances of each case and the type of person considering a second mortgage. A second mortgage can be affordable. There are risks involved, however.
Owning your own home gives you a financial advantage. The equity you have built in your home may be used to pay off debt. The loans can be affordable. They may be useful.
With a second mortgage, you would receive a loan based on your home’s equity. That number is determined by subtracting the money owed from the market value of your home. For example, say you owe $20,000 on a $100,000 home, your equity would be $80,000-the amount you have paid on your home.
After your loan would be approved and your money received, you could then use the funds to pay off high interest credit card balances, personal loans, car loans, student loans, and other type of debt. You could also use the money to pay past due bills, such as utility bills, or medical expenses. Some people use a second mortgage for a business loan or to make home improvements.
As with any type of loan, a second mortgage has to be repaid within a specified time frame. Second mortgages typically have terms of seven, ten, or fifteen years. Home equity loans often have fixed and lower rates and are often easier to pay off than a credit card. Interest from a second mortgage used to pay debt can be tax deductible. Credit card interest is not.
A second mortgage might give you the chance to become debt free. If you continue to make only the minimum payment on a credit card it typically might take you 30 years to pay it off. A second mortgage might also require careful planning on your part, however.
Once credit cards are paid off it might be wise to close accounts. Some people who do use a home equity loans to eliminate debt soon max out new credit cards. Excessive debt can make it impossible to make payments on a second mortgage, if you should max out a new card before your second mortgage is paid.
Besides the possibility of repeating past mistakes, if you don’t learn from your past when you obtain a second mortgage, another danger of a second mortgage is it can put your home in jeopardy. Before taking a second mortgage you should carefully examine whether you can afford it. You would not want a lender to repossess your home.
There can be higher risks for second mortgages. There can be lower interest rates if the second mortgage is obtained from a nonprofit agency or state financing housing agency, however.
According to the website of the Housing and Urban Development, www.hud.gov, because second mortgages are used to “subordinate first mortgages, second mortgages carry higher risk. Therefore, for-profit lenders typically impose higher interest rates on these loans. However, many nonprofit lenders and state housing finance agencies offer second mortgages at below-market rates. These lenders are also more likely to be flexible about deferring payments in the event of temporary financial hardships.”
You might wonder if you could qualify for a second mortgage. There are a wide variety of programs, and under some, you could receive up to 125% of the value of your home, thus making it possible to get such a loan even if you have no equity. As with first mortgages, the higher interest you will pay, and the less you will be able to borrow.
If you are facing unexpected financial hardships, a second mortgage might be for you, but it might not. It depends upon your particular circumstances. It would pay to talk to an expert.
