Pros and Cons of a Second Mortgage as Debt Consolidation

Second mortgage debt consolidation has pros and cons. The risks you want to take depends on your situation. Consolidating your unsecured debts into a second mortgage means that your trying to accomplish two things. First, you’re paying off unsecured creditors debts such as credit card bills, debt collection agencies and medical bills. Second, shifting the debts that you paid original creditors to one new creditor--a mortgage lender. More importantly, you’re using your home as collateral in case you default on your payments to your lender.

A Second Mortgage Is Called Different Things

A second mortgage is also called a home equity loan. The second mortgage is similar to cash-out refinancing where you are granted access to your home’s equity. Unlike cash-out refinancing, which is another debt consolidation loan that involves you mortgage, your mortgage is not refinanced.

The Pros Of a Second Mortgage Debt Consolidation Means Are Lower Rates

Unlike other debt consolidation loans such as unsecured loans and credit cards, a second mortgage has a lower interest rate. This means that you pay less money every month to than you would with other debt consolidation loans. In addition, second mortgage has another advantage. The interest rate is likely to be tax deductible, according to the Lending Tree.

The Cons of a Second Mortgage Debt Consolidation Means You Can Lose Your Home

Granted, the interest rates on your second mortgage is lower. However, the interest rate may be higher than your first mortgage on your home. Another con, or disadvantage, is that you can’t use the equity in your home. Also, you must pay of the second mortgage, or home equity loan, when you want to sell your home.

The biggest disadvantage of a second mortgage debt consolidation is that you’re using your home to pay off unsecured debts. If you miss payments and default, the lender can foreclose on your property. This means that you lose your home because you used it as collateral to pay off medical bills or credit card debts.

Seek Legal Help About Paying Of Unsecured Debts

There are many debt management options out there besides using a second mortgage to pay off debts. So consult a lawyer who will evaluate your financial situation and advise you what to do. For instance, your lawyer may advise you to work with creditors to lower your debts or an unsecured debt consolidation loan (where there’s no collateral pledged).