Debt Consolidation: Should You Get A Second Mortgage?

Are you considering debt consolidation, and you’re wondering if a second mortgage is the way to go? Then you won’t want to miss the rest of this post. We are going to answer, “Should you get a second mortgage?” as well as many of your other questions surrounding debt consolidation.

First, let’s start with the basics.

What Is Debt Consolidation?

Debt consolidation 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 standard method consists of taking out a second mortgage on your house (also known as a home equity loan). We know this can be a difficult decision which is why it’s so important to weigh the pros and cons before you go ahead with it. 

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    should I get a second mortgage

    Should You Get A Second Mortgage?

    Here’s what you need to know 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. Let’s say you have a $300,000 mortgage on a house worth $450,000. Then you own a portion of your home worth $150,000. The $150,000 is your 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 have to be 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 rates have been unsteady, and a variable interest rate could be disadvantageous in the long run. It would be best if you also avoided 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.

    (We also weigh the pros and cons of four other debt consolidation options in this post

     

    Cons: Conditions And Risks

    Not everyone is a good candidate for consolidating their debt with a home equity loan. One requirement has enough equity to pay back the entirety of the debts you want to consolidate, for starters. At the same time, factors such as your credit score, debt-to-income ratio, and employment history may impact the interest rate you’ll get in ways you don’t expect.

    It would help if you also kept in mind that consolidating your debts through a second mortgage means you’re transforming an unsecured debt into a secured one. Because of this, missing payments could result in the bank foreclosing on your home.

    (We explore the differences between secured and unsecured debts here)

     

    Are There Other Options Than A Second Mortgage?

    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 are here to help you explore all of the options available to you and get you back on the path to a bright financial future.

    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.

    Did you learn a lot from this post about debt consolidation and second mortgages?

    *This post was first published in 2020 and updated in 2021 just for you.

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    When should you file for bankruptcy?
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    When should you file for bankruptcy?
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    Should I get a second mortgage? Rhonda Fox-Miles at Fox Miles and Associates frequently gets asked this question. If you have the same question, you aren’t alone. And today, we’ll help you find the answers you are looking for.
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    Fox-Miles & Associates Licensed Insolvency Trustee
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