The Pros and Cons of a Second Mortgage

There are several approaches you can take when trying to deal with debt. These options include negotiating with your creditors individually, using a debt settlement firm to broker a deal for you, filing for bankruptcy, or entering into a consumer proposal. All of these options have their own merits, and may be right for you depending upon your situation. Another possibility if you own your own home is to take out a second mortgage against the equity in your home. This can be used to pay off any existing debt, or for any home improvements you can think of, but in this case we’re going to assume you’re using the second mortgage to pay off a mountain of debt you’ve accumulated.

Pros

You don’t wat to enter into a second mortgage lightly as it will be secured against the equity in your home. Having said that, if you’re suffering under the burden of thousands of dollars in credit card debt, and bills that are always behind, a second mortgage is a chance to wipe the slate clean and consolidate all of your debts into one payment – normally at a better interest rate than your credit card company is offering.

The other great thing about a second mortgage is that the payments may be much less than you might otherwise pay because payment is spread out over a much longer term – often 25 or 30 years. In the long run you may end up paying more, but the monthly hit on your finances is much less. Most people are more concerned with making ends meet, not how much extra they’re going to have to pay in the long run.

Let’s say you take out a second mortgage of $25,000 and your total outstanding debts are only about $10,000 – that’s $15,000 extra in liquid cash you now have available to you here and now. Of course nothing’s free, but having that much cash available to you now is very attractive to many home owners. You can spend it on things like cars or boats, or, if you’re smart, you can invest some of it wisely and turn that extra money into a financial windfall. If you make the right investments, that second mortgage can actually make you money.

Cons

While a second mortgage may seem like a great solution to your financial problems, there are some negatives to consider. First, a second mortgage will almost always have a considerably higher interest rate than you’re first one. If it’s with a bank it may be as much as 12 percent, and if it’s with a private lender it can be much higher. For the first few years, chances are most of what you’re paying will be interest.

You’re also relinquishing most, if not all, of the equity you have built up in your house. If an emergency comes up you may have no other options but to sell your house and start over. For this reason you should always try all other avenues you can think of to pay off outstanding debts before considering taking out a second mortgage.

Final Verdict

Second mortgages are a great option for a lot of home owners. It can help you to wipe the slate clean and sometimes a fresh start is all you need to get your house in order. The problem is many home owners don’t learn their lesson and soon find the debts mounting again, and now they don’t have the option of taking out a second mortgage leaving bankruptcy or a consumer proposal as the only options left to them. If you’re going to take out a second mortgage to pay off unserviceable debt be smart – make sure you use it to break the cycle of debt, not to perpetuate it.

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