Many American homeowners are finding it very difficult to make ends meet these days. Inflation is making everyone sweat, and the need to do home maintenance always seems to pop up at the worst possible time.
There are ways to start saving money or even making extra money. You can learn how to buy affordable home insurance and replace your overpriced policy. You can rent out a spare room on Airbnb. However, if you’re struggling with debt, that can render any savings irrelevant.
You may have heard about people taking a second mortgage. This is not the same as refinancing your mortgage to get a better rate. Rather, it is getting a second mortgage in conjunction with your first on the same home. You can pay off some or all of your other debt with the extra funds.
But is this a good idea or is it only replacing one debt with another? Here’s why people choose to get a second mortgage.
How Does A Second Mortgage Work?
You can take out a second mortgage for your current home equity. Home equity refers to how much of your home you have paid off by now on your first mortgage. Essentially, your second mortgage is a way of remortgaging that equity.
This means that if you’re a fairly new homeowner, a second mortgage is not a real possibility unless you put a big deposit down on the house.
The benefit of getting a second mortgage is that the interest rate is going to be much lower than what you’re paying on most other debts, considering that the mortgage is secured with your home. So, if you have a lot of credit card debt and payday (or other unsecured) loans, using a second mortgage to pay them off essentially lowers your interest rate significantly.
It is similar to debt consolidation, except that you have security that ensures you will get a low-interest rate.
Is a second mortgage worth it?
The answer to this question will depend on you and your circumstances. However, a second mortgage is often a good option that helps people get out of major debt.
People are scared to take a second mortgage because they do not want to risk their home as security on two loans. They, therefore, take a chance on the high-interest debt.
The thing is, you may be far more likely to default on your first mortgage if you are burdened by the high interest of those other debts. At best, you may be lowering your quality of life significantly to keep up with those payments that barely make a dent into what you owe.
A lack of alternatives
It is also important to mention that, in the US, there are not many alternatives for people struggling with high interest debt. The fact is that these debts have probably already hurt your credit score, meaning any future loans you take out are going to come with an even higher interest rate.
Unless you have another expensive asset lying around, your home is the best bet to get a loan with anything even approaching a decent interest rate. It might not feel great to essentially go back to (close to) square one in terms of paying off your house, but it is better than paying money into the void of uncontrollable debt.
Getting a second mortgage is worth it for most homeowners who are struggling with debt. In 2022, you also have the security of higher property values than ever before. For this reason, your home is unlikely to lose value to below what you paid for it, which is usually a possibility for people who take out a second mortgage.
There are few better ways to get out of debt, even if it puts your home equity at risk.