Do you think getting a second mortgage is a good strategy to consolidate your multiple debts? For some people, it has some merits. Your home is your own and you can use it if it means you can improve your current financial situation.
According to reports, a lot of people use their homes to boost their finances. In fact, there is a rise in the use of home-equity loans to pay for the college fees of their children. It is said that people prefer it over Parent PLUS loans because of the interest rate. It is not surprising that people will also use it to help with their other debts.
While a second mortgage will give you the funds to deal with your debt situation, is it really the best strategy among your other options?
Before you decide, it might be better to get to know this debt consolidation option further.
What is a second mortgage?
According to one survey, a lot of consumers are getting a lot of facts wrong when it comes to mortgages. If you want to use a mortgage to help improve your current debt situation, you need to make sure that you completely understand what it involves.
Second mortgage definition
Basically, a second mortgage is another loan on top of your original mortgage. Most of the time, people use this to pay for Private Mortgage Insurance (PMI) that is required if they do not meet the minimum down payment. It can also be used to cash out the equity that is already on a property. The bottom line is, you will be borrowing against the value of your home. That means if you do not use this mortgage properly, you might end up losing your home in the process.
When you borrow this mortgage, you need to keep in mind that you still have a primary mortgage to pay off. It is okay to use this as long as you do not add any more. Two loans can endanger your home. If you fail to pay either one of these, you might end up losing your home.
Home equity line of credit vs second mortgages
You may be wondering, how different is this from using a home equity line of credit? Both of these can be used to consolidate your debts. However, the manner by which you can get the loan will be different.
With a second mortgage, you will get the money as a one-time payout. The payment will be a fixed amount that will be stretched out until the end of the repayment period. Take note that the payment for the second mortgage will end up being higher in amount because it will only take payment after the first mortgage is paid off.
But with a home equity line of credit, you get it as revolving debt. It works like a credit card – but with your home as collateral. Usually, you are given a number of checks that can be used to get the money when you need it. And until you do, there will be no debt on your record for that account. Once you start using the credit, that is the only time that you will be making monthly payments. And this amount will only depend on the amount that you used – and not until the credit limit. As long as you do not reach the limit, you can keep on using the funds in the home equity line of credit.
Applying for a second mortgage
If you want to use a second mortgage to help with debt consolidation, you need to apply for one. The process is the same as when you got your first mortgage. You will go to a lender to apply for the loan. Since your home will be used as collateral, it will have to be appraised. This means the lender will check the value of the house. Take note that you will be required to pay the origination fee.
If you plan to use this to consolidate debts, you need to keep paying the original debts. The approval process of a second mortgage will take time because the house still has to be appraised.
Pros and cons of using a second mortgage to consolidate debt
Now that you know more about the second mortgage, the question remains as to whether it is a good idea to use it or not. You do not want to waste your time on the wrong strategy in consolidating debts. As mentioned, you need to pay the origination fee when you apply for this loan. That would be wasted if you end up making a mistake in choosing this debt consolidation strategy.
To help you decide, here are the advantages and disadvantages of getting a second mortgage to consolidate debts.
One of the best reasons to use a second mortgage is to lower the interest rate of your debts. If you have mostly high-interest credit card debts, you will really save a lot of money when you consolidate debts this way.
Some people will use a debt consolidation loan – and it is an effective strategy to get out of debt. However, if you really want a low-interest loan, then using your home as collateral is a good idea.
Another benefit of using this type of loan is the amount. Your home has a high value – especially when you already have a lot of equity on it. That means you can borrow a lot of money if you use it as collateral.
The main reason why experts discourage people from using this to consolidate debt is that it can endanger your home. If you fail to pay off the loan, there is a risk of foreclosure and you can lose your home forever.
When you get a second mortgage on top of your first one, you will have a lot of debts to your name. It will be harder for you to refinance. Not only that, in case you need to sell your home quickly, it will become a problem.
And if you think the origination fee is the only thing that you need to pay off, that is not true. You may have to pay other fees like the title fees, appraisal, etc. These can cost in the thousands.
Should you use a second mortgage to consolidate?
It actually depends on you. If you know that you can control yourself and keep a tight grip on your spending, then go ahead. Just keep in mind that your house is on the line. If you fail to pay this back, you can say goodbye to homeownership.
Of course, there is also the problem of what caused the debt in the first place. Make sure you address the reason why your debt accumulated so much that you needed to borrow a second mortgage. Do not fall under a false sense of debt freedom. Remember that your debt is not yet paid off. You just shifted that so it is under one loan. For instance, your credit card balance is still there but is now in the second mortgage that you borrowed.