If you are carrying high interest debt on credit cards or on other high interest lines of credit, one thing to consider is to take out a second mortgage on your house.
A second mortgage is another loan on your home in addition to your first mortgage. Your home is used as the collateral so you will be able to get a much lower interest rate than on unsecured lines of credit.
Talk to a trusted second mortgage lender to see if you qualify for an affordable loan to consolidate your debt effectively.
Here are some very good reasons you should think about consolidating your debt with a second mortgage loan:
#1 You Will Save Big On Interest
Let’s say you have credit card debt with an interest rate of 18%. You may be able to get a line of credit on your house (second mortgage) at 5% or 7%. This will save you a ton of money on interest every year.
With the lower payments you are making on your debt, you may be able to invest that money into the stock market, real estate, or something that makes you money. Some people like to put the difference into mutual funds and make a nice rate of return.
#2 You Can Write Off the Interest
One of the biggest downsides of having credit card debt is that the interest cannot be written off on your taxes. For most Americans, you can deduct the mortgage interest off of your federal and even state taxes.
The mortgage interest deduction is one of the most valuable reasons to own a home in America today. Why not take more advantage of the deduction by consolidating your debt with a second mortgage? Discuss the potential tax advantages with a financial adviser or second mortgage lender that you trust.
#3 You Will Have Just One Payment Every Month
Isn’t it a pain to have to pay several credit card bills each month? By consolidating your debt with a second mortgage, you will only need to make one payment each month.
Many people find that paying just one time per month is much more convenient.
#4 Equity Locked Up In Your House Can Be Bad
Many people have a lot of equity tied up in their home. But for many of them, they enjoy no benefits of that cash until they sell their home. This could be a decade away or more.
Also, there is the possibility that your house could decline in value. That equity that you have is just money on paper. Some people prefer to pull their equity out when it is available and consolidate debt with it.
#5 It Can Raise Your Credit Score
Credit card debt generally will lower your credit score more than mortgage debt. The reason is that credit card debt is unsecured debt that people are historically more likely to default on. There is nothing backing up that debt.
On the other hand, people tend to make their mortgage payment, and credit bureaus like to see installment loan debt rather than just credit card debt.
By taking on more debt on your home, you can actually end up raising your score.
Those are the best five reasons to consolidate your debt with your second mortgage. Now let’s look at the two types of second mortgages you can get:
Home Equity Line of Credit (HELOC)
This is a line of credit just like a credit card, but the line of credit is the equity in your home. If you have $50,000 in equity in your home, you may be able to get a line of credit for $40,000 or $45,000, depending upon your lender.
This line of credit will have a variable interest rate; most often, it is an interest only payment for the first five or ten years. The rate can adjust with market rates. Generally, this rate will be lower because it is variable, but it can go up or down within limits.
When the draw period is over, you will need to start paying principal and interest, and your payment will go up substantially. Thus, you will want to pay off the HELOC as soon as you can.
One up side of a HELOC is that you do not pay interest on the money until you draw it out.
Home Equity Loan (AKA, Fixed Second Mortgage)
Your other option is a home equity loan, which is a lump sum payment of equity that you can get at once. This is more suitable for people who want to pay for something all at once, such as credit card debt.
These loans usually have a fixed interest rate. While it will usually be higher than a HELOC interest rate, it is fixed and cannot go up or down. Some people prefer this because of the additional financial security. Make sure that you shop rates, terms and closing costs with competitive second mortgage lenders, before making a commitment.
The Bottom Line
Taking out a second mortgage to consolidate debt often makes sense. You will pay lower interest, and you will be able to usually write it off on your taxes.
However, remember that when you get a second mortgage, you home is securing the debt. So if you do not pay, your home is now on the line.
Taking on a second mortgage also means that you are freeing up your credit card lines of credit. Make sure that you do not run them up again. Otherwise, you now have a second mortgage to pay, plus your credit cards.
But for many people, taking out a second mortgage to consolidate debt is a smart move. Make sure that you shop around to see which lender offers the lowest rates and fees.