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 an excellent way to consolidate debt and it’s secured on your home in addition to your first mortgage. The RefiGuide suggests using a second mortgage to pay off high-interest credit card debt, or any other revolving adjustable rate loans, to improve your financial situation.
The Second Mortgage May Be the Best Financial Tool to Maximize Debt Consolidation in 2024
- Interest rates for second mortgages are usually lower than credit card rates.
- With fixed rates on 2nd mortgage loans, your monthly payments remain consistent and predictable.
- Second mortgages enable homeowners to refinance credit card debt into a reduced payment for significant savings.
Homeowners revere 2nd mortgages because the offer the potential for lower monthly payments when consolidating debt that has higher adjustable interest rates. The debt consolidation second mortgage is highly touted finance vehicle for consumers in all 50 states.
This is one of the few fixed rate installment loans that is available to homeowners seeking lower payments from simple interest debt consolidation.
Consolidating debt with a second mortgage often results in the borrower enjoying reduced monthly payments from a decrease in interest rates and an extended loan term. For homeowners with limited monthly budgets, the 2nd-mortgage savings might offer the necessary relief to effectively manage and alleviate debt burdens.
Taking out a home equity loan to refinance debt can be a pragmatic financial move that provides new opportunities.
Can You Get a Second Mortgage to Pay Off Bills and Credit Card Debt?
Second mortgages offer another avenue for consolidating debt by leveraging the funds to settle other forms of outstanding debt, potentially with higher interest rates.
Getting a 2nd mortgage to pay off debt like high interest revolving credit cards may lower your debt burden and increase your cash flow. When executed correctly, debt consolidation could help enhance your credit score.
Talk to a Trusted Second Mortgage Broker to See if you Qualify for an Affordable Loan to Consolidate your Debt Effectively
The second mortgage is considered a valuable financial tool for homeowners to consolidate credit debt and high interest loans. 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.
As second mortgages typically offer lower interest rates compared to personal loans, transitioning high-interest debt to a 2nd mortgage could result in substantial savings in interest payments, potentially amounting to thousands of dollars over time.
With a reduced interest rate, a greater portion of your monthly payment can be allocated towards reducing your principal balance. If it works with your budget, choosing a shorter repayment term could also facilitate an expedited debt payoff.
When consolidating debt with a second mortgage, it is always prudent to discuss your plans with a financial adviser before signing loan documents. Before committing to another loan, let’s consider the benefits and drawbacks to contemplate as you determine whether second mortgage debt consolidation aligns with your specific circumstances.
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 7% or 8%. 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. If you have low scores, consider home equity loans with no credit check,
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.
Home equity lines 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. Learn about the pros and cons of the HELOC and home equity loan.
Home Equity Loan (AKA, Fixed 2nd 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. If you have an interest rate on your first mortgage above the market average, then get a refinance with cash out as it may be the best choice.
However rates have been rising dramatically so an equity loan may actually be the best opportunity to consolidate debt. What do you need to qualify for a home equity loan?
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 the fixed home equity loan because of the additional financial security.
Make sure that you shop 2nd mortgage rates, terms and closing costs with competitive second mortgage lenders, before making a commitment. Read more about comparing the refinance to the home equity loan.
Are There Closing Costs on Second Mortgages?
Most mortgage lenders charge closing costs such as processing fees, origination, application fees, escrow, title and recording fees, which typically range from 1% to 4% of the 2nd mortgage loan amount. Nevertheless, certain home equity lenders may cover your closing costs, so we recommend asking.
Since many HELOCs and second mortgages have closing costs it is very important that you determine the savings when consolidating debt. You must justify paying closing costs on a 2nd mortgage by realizing lower payments that improve your financial state.
What Are the 2nd Mortgage Requirements to Consolidate Debt?
As you contemplate this borrowing against your home for debt consolidation, it’s essential to recognize that these criteria represent the minimum requirements. Mortgage lenders and banks utilize these benchmarks to assess the likelihood of your ability to meet loan payments, thus a lower debt-to-income ratio and higher credit score can significantly enhance your approval prospects.
- Loan to Value (LTV – How Much Equity You Have)
- Credit Score
- Debt to Income Ratio (DTI)
When shopping for a debt consolidation loan, ask the broker what their minimum requirements are for credit score, DTI and LTV to determine you eligibility. You do not want to waste your time if you do not have the minimum credentials.
What is the Risk to a Second Mortgage?
With a second mortgage, your home serves as collateral. In the event that you’re unable to maintain your mortgage payments, the bank reserves the right to foreclose on your home.
The Bottom Line on a 2nd Mortgage for Debt Consolidation
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 loan, you home is securing the debt. So if you do not pay, your home is now on the line.
Rather than managing multiple payments across various financial obligations such as personal loans, credit cards, and other debts, consolidating with a 2nd mortgage allows you to streamline all your debts into a single payment. This simplifies the management of your monthly financial commitments.
Taking out 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.
Evaluating the advantages and disadvantages is a pivotal aspect of any decision-making process, particularly when the choice at hand could carry significant implications for your financial well-being.
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.
About RefiGuide.org
Bryan Dornan is a financial journalist and currently serves as Chief Editor of RefiGuide.org. Bryan has worked as a mortgage loan officer in the industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.
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