Why Homeowners Should Consider Second Mortgages to Help Get Out of Debt

Finding yourself in financial hot water is not the most exciting time in life. There is a large demographic of people living in the United States with more debt than they can reasonably handle. While bankruptcy is the option for some, others can utilize the equity available in their home. Typically, those that have debt on a credit card are paying anywhere from 10 to 20 percent annual interest. If you miss just one payment, that rate can skyrocket to upwards of 28 percent. Combine that with the ability to just pay the minimum payment and a consumer's feeling of being trapped becomes very real. There are, however, a couple of different options for you outside of bankruptcy. The first one that should be researched is the second mortgage.

The Second Mortgage – What is it?

A second mortgage is a loan that has been secured by your home. This is provided, however, that you have room between what you already owe on the home and how much the house is worth. If that difference is say, 30 percent, that is the maximum amount of your home's value in which you can take out the second mortgage.

Debt Consolidation Options for Homeowners

Since the overall purpose of debt consolidation is debt relief, the second mortgage combined with debt consolidation practices is a proven way to alleviate debt. If, for example, you have $30,000 dollars worth of credit card debt, the first step that you should seek out is to consolidate that debt into one loan. If your credit is good you may be able to qualify for a loan from your bank for all or part of the money that you need to get out of debt. Typically, this loan will allow you to pay off your existing debt and transfer it to a once per month payment at a better interest rate.

If you are unable to get all of the funds needed, look into using your best asset, the house. Taking out a second mortgage will allow you the freedom of a cheaper interest rate and a little bit more time to pay off what is owed on the credit cards.

The Game Plan for Getting Out of Debt

Here is a little tidbit of advice. Anytime you look at the lifetime of a loan, just know that mathematically, that loan can be paid in half the time! How? Pay 25 percent more than the minimum payment. Paying this much money every month toward your loan in addition to the minimum payment will cut your loan repayment time in half. Compare what your payments are now versus a second mortgage loan payment with a 25 percent increase in payment. Typically, your new interest rate will be so low that you will be able to accomplish this and still pay less than you would paying off your cards as is. So, not only are you saving money in interest, but you will pay off your loan faster than any other option.

Benefits of Second Mortgages

The side benefits of using a second mortgage with a debt consolidation program is the fact that your credit will immediately improve. This is a result of the second mortgage paying off your existing credit card debt. Further, while you would not want to get yourself in another bad financial situation, once the credit cards have been paid off you will have the freedom to negotiate lower interest rates.