Avoiding Pitfalls: Common Mistakes to Watch Out for When Considering a Second Mortgage for Debt Consolidation
Debt is like a seesaw, cutting both ways. On the one hand, it can provide much-needed leverage for financial growth and wealth creation. And on the other hand, it can weigh you down, tilting the balance unfavourably.
If you are struggling to repay your debts, there are several avenues you can leverage to regain or maintain a healthy financial position. One popular and effective technique is to get a second mortgage and use it to pay off smaller, high-interest debts. In the sections below, you’ll learn how second mortgages for debt consolidation works. Contact us today.
What is Debt Consolidation?
When you take on several smaller loans, you risk missing repayments or defaulting on some. This could be due to financial challenges, poor planning, or simply forgetting to repay on time. A solution is often to consolidate all these small loans into a bigger one. In other words, you take on one big loan (preferably a low-interest loan) and use it to settle all the smaller loans.
This process of paying off smaller loans using a bigger loan is called debt consolidation. There are several ways of consolidating loans.
These include: using personal loans, equity in owned vehicles, and second mortgages. Second mortgages offer the most benefits and are the
most popular ways to consolidate debts.
Why a Second Mortgage for Debt Consolidation?
A second mortgage is a loan on top of the primary mortgage. When you take on a second mortgage, you either turn your home equity into a big loan or activate a home equity line of credit (HELOC). Besides the lower interest rates, here are the other reasons why second mortgages work best:
- Higher loan amounts: if you have paid a considerable amount of your first mortgage, your lender may approve a higher loan amount, sometimes up to 90% of your home equity.
- Convenience: your home equity is a great asset, and second mortgages offer an easy and convenient way to utilize it.
Mistakes to Watch When Considering Second Mortgages for Debt Consolidation
Using second mortgages for debt consolidation is a smarter alternative. Still, people make several mistakes, which could cancel most of the loan’s benefits. To avoid falling into this trap, you should be wary of the following common mistakes:
- Not having a solid money management plan – before consolidating your debts, you should understand how you got into debt. If you haven’t identified the cause of the problem, taking on a second mortgage for debt consolidation would be another Band-Aid solution.
- Neglecting your credit score: As much as you’ll be using the equity in your home to secure the loan, your credit history still plays a critical role. Before applying for a second mortgage, check your credit report and work on improving it.
- Choosing the longest term possible: while this may significantly lower your monthly payments, you will pay more interest over the loan period. This can be pretty expensive in the long run.
- Failing to verify the lender’s subordination policy: not all second mortgage lenders will give up their first-lien status to allow a refinance. If you want to refinance your primary (first) mortgage, ensure the second mortgage lender can subordinate its loan, i.e., put it behind the new first mortgage.
- Failing to check the second mortgage tax deduction – home equity loan may not be fully tax-deductible. Always work with an expert tax advisor to assess your financial situation and provide accurate information.
Make a Second Mortgage for Debt Consolidation Work for You
When consolidating your debts, second mortgage financing is one of the most cost-effective options you can get your hands on. However, it would help if you were keen enough to avoid the mistakes we have highlighted above. Call BMC Mortgage & Investments to guide you through the debt consolidation process.