When it comes to paying off your debt, it’s important to weigh all your options.
Debt consolidation involves taking out a large loan to pay off several smaller loans. It can be a great way to stabilize your finances or avoid insolvency, and a common consolidation option is to take out a second mortgage on your house. The question is: is it a good idea? Let’s take a look at the advantages and disadvantages.
How Does it Work?
Taking out a second mortgage, also known as a home equity loan, means borrowing money against the portion of your house that you own. If your house is worth $400,000 and your mortgage is for $350,000, then you own $50,000 of your house. That portion is known as equity, and your bank may allow you to use some of it to pay off smaller loans or bills, including credit card debt.
PRO: Low Interest Rates
The main advantage of consolidating debt with a second mortgage is that you’ll have a lot less interest to pay. While interest rates on mortgages are currently very low (between 2% and 5%) don’t count on them staying at this rate forever. If you decide to refinance your home, plan for higher interest payments in the long term unless you get a fixed-rate mortgage. If possible, avoid finance companies and sub-prime lenders offering mortgages, as their interest rates are typically much higher, up to 30%.
PRO: Flexible Payment Arrangements
In most cases, you’ll be able to extend your amortization, which is the length of time you have to pay back the loan. This means it’s possible to tailor your monthly payments to your income.
CON: Conditions Apply
To be eligible for a second mortgage, you need to have enough equity to cover the entirety of the debts you want to consolidate. In addition, your credit score, employment history and debt-to-income ratio will be taken into account when setting your interest rate. If your credit score isn’t great, you may have to pay higher interest rates than anticipated.
CON: Risk of Foreclosure
Paying off credit cards with an equity loan effectively transforms an unsecured debt into a secured debt, which means the bank is entitled to take your house if you don’t make your payments.
There Are Other Options – Speak With A Licensed Insolvency Trustee Today!
If you’re facing financial difficulties, it’s a good idea to consult licensed insolvency trustees. A second mortgage isn’t always the best option. The licensed insolvency trustees at D. & A. Macleod Company can help you find the right debt consolidation plan or help you avoid having to resort to bankruptcy proceedings. Call us today to set up a free consultation. Let us help you find a new beginning ™!