20/06/2019 0 Comments
Debt consolidation: Should You Get a Second Mortgage?
Consolidating debt involves taking out a large loan to pay off a collection of smaller loans. There’s more than one way to consolidate debt but one common method involves taking out a second mortgage on your house (also known as a home equity loan). Here’s what you need to know in order to decide if this is the right option for you.
How Home Equity Loans Work
Taking out a home equity loan means borrowing money against the portion of your house that you own. If you have a $300,000 mortgage on a house worth $450,000, then you own a portion of your home worth $150,000. This is called equity, and you may be allowed to use some of it to pay off credit card debt and other smaller loans.
Pros: Low Interest Rates and Flexibility
Because mortgages and home equity loans are backed by collateral, they typically come with much lower interest rates than the average unsecured loan or credit card. If possible, you should aim to get a fixed-rate mortgage. Interest rests have been rising in the last year and a variable interest rate could be disadvantageous in the long run. You should also avoid finance companies and sub-prime lenders, who often have interest rates of up to 30%.
Another benefit of consolidating your debt with a second mortgage is that you’ll likely be able to extend the length of time you have to pay back the loan, allowing you to tailor your payments to your income.
Cons: Conditions and Risks
Not everyone is a good candidate for consolidating their debt with a home equity loan. For starters, it’s required that you have enough equity to pay back the entirety of the debts you want to consolidate. Moreover, factors such as your credit score, debt-to-income ratio and employment history may impact the interest rate you’ll get in ways you didn’t expect.
You should also keep in mind that consolidating your debts through a second mortgage means that you’re transforming an unsecured debt into a secured one. Because of this, missing payments could result in the bank foreclosing on your home.
Are There Other Options?
Taking out a second mortgage isn’t always the best option. If you’re facing financial difficulties, consult a licensed insolvency trustee at Fox-Miles & Associates Inc. We can help you with credit counselling or debt consolidation and our service area includes Edmonton, St. Albert, Spruce Grove, Edson, Sherwood Park, Fort Saskatchewan, Leduc and Stony Plain. Call us today to schedule a free consultation.