By David Pilley on September 27, 2011
.jpg.aspx?width=75&height=75) Consolidating your credit card balances into a second mortgage may be a way to pay less interest. Credit card debt is unsecured, and interest rates often run above 20%. Second mortgages, on the other hand, are secured against the equity or the value of the home itself, and their interest rates will usually be in the teens. You may enjoy having a lower interest rate, and the interest on a second mortgage may be tax-deductible, but be careful because a second mortgage may significantly hinder your mobility.
First off, you need to be aware of the extra costs of a second mortgage. Sure, its interest rate may be half of the average interest rate on your credit cards. However, there is a lot of paperwork involved, and it involves more than just another lender. An appraiser will need to estimate the current value of the home, and there will also be closing costs once the transaction is complete. You will save some money from a lower interest rate, but these upfront fees will limit the savings to the long run.
Another issue with a second mortgage involves your mortgage insurance. At the beginning of a mortgage loan, you pay private mortgage insurance (PMI) until your balance is less than a specified amount. The most common rule is after at least five years (60 monthly mortgage payments) and having a balance less than 80% of the current value. Cancelling your PMI is another way to save a little bit of money, so the quicker you can do it, the better. If you are considering a second mortgage to consolidate your credit cards, do it after you have had your PMI cancelled. Many lenders may not allow it to be cancelled if you have a second mortgage, and this could be another extra cost that prevents any real savings.
The main problem with a second mortgage is how immobile you become. You now have not one, but two lenders involved in loans with your home. If terms of your first mortgage become unfavorable and you wish to refinance, it will be nearly impossible. While the lender of the second mortgage may agree to be subordinate to the first mortgage, he/she still has a say in any loan modifications. Therefore, a mortgage refinance will require approval of both lenders.
A second mortgage may also result in you being financially stuck in your home. It can cause your total mortgage debt to be more than the actual value of the home, meaning you would lose money if you sold your home. You need to find some way to come up with the extra cash, and you will also have to wait until the property value increases to see any gains on your investment. Waiting for your property to gain in value may take years! It is obvious that getting a second mortgage has risks. Be cautious, as a lower interest rate does not necessarily mean you will achieve any savings.
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