Is It a Good Idea to Consolidate Your Credit Card Debt Into a Second Mortgage?

Even when credit is tough, those with significant home equity will find that there are plenty of lenders willing to offer debt consolidation loans backed by home equity. The terms you can get on such loans are dependent upon just how much home equity you have and your standing on your primary home mortgage. In some cases, a second mortgage offers the best possible interest rate and repayment terms on the debt you carry. However, if there is even a small chance that you won't be able to meet the repayment terms, you may be better off defaulting on your unsecured debt than risking your home.

A Word About Tight Credit

There are many difficult, even risky, decisions that must be made these days about how to handle job losses and mounting debt. The fact that personal loans are nearly impossible for most people to get these days makes these decisions all the more difficult and complex. The exception, as mentioned, is that there is still plenty of credit available for those with substantially more assets than debt. Traditionally, the home mortgage provides personal credit opportunities at the best combination of terms and interest rates. This is because houses are fairly liquid assets that don't lose much value.

You may be wondering how, in a time like this, houses could be considered either liquid or stable in this housing market. When you have significant home equity, which is the present market value of your home minus any debt claims secured by your home, the bank's risk in loaning you money is much smaller. The bank must estimate what your house can be sold for quickly in determining how much money it can loan you without incurring a loss if you default on the loan.

If your loan request is for less than the difference, you should get very good loan terms. If you are seeking more than the difference, you may still qualify for a second mortgage, but at much less favorable terms. The reason the lender would still be willing to loan you money is that you have paid a lot of money into the home and are statistically more likely to be motivated to find a way to make your payments.

The main thing to remember is that regardless of how much money you borrow against your home, if you default you'll probably lose your home. This is precisely why it is important never to borrow against your home unless you're pretty sure of your ability to make your payments.

Sometimes You Just Have to Pay for Your Debt Mess

As you can see, a second mortgage generally offers the best possible terms on long term debt consolidation, but the risk may just not be worth the savings. You may be better off continuing to pay high interest rates to a large selection of creditors. There is a reason you're in debt now, and if that reason persists, you need to limit your damages. If that means paying higher interest rates for a while, or even a failure to make payments, that may be a better option than failing to make payments on debt secured against your home.

Even if you are overwhelmed by debt and high interest rates, and personal loans are unobtainable, there are other options. You may have to go through the pain of negotiating new repayment terms with all of your current creditors. They will be motivated to work with you because they don't want you to fail to repay them. If you are not equipped to do this yourself, a financial adviser can be a good resource to help you work your way back out of debt. There are also agencies that specialize in helping people in your situation, but be sure to check on them at the Better Business Bureau before signing up for anything.

If you've got significant home equity and a stable income, a second mortgage can be very useful to relieve debt load and lower interest rates. Otherwise, you should look into other forms of debt management.

Share this post