Using a Home Equity Loan or a Second Mortgage for Debt Relief

Should you consider a home equity loan or a second mortgage to relieve some debt? Be careful where your home is concerned

When considering a loan for debt relief, you should be looking at several things before committing to anything. First, there is your actual situation. Is it really unmanageable with your present finances? Do you really require a maneuver of this magnitude to get a handle on it? If the answers are “Yes”, then take it up to the next level.

What are the Ramifications of a Second Mortgage or a Home Equity Loan?

A second mortgage leaves your first mortgage intact and untouched. When the deal is closed, you will have two mortgage payments. While that may sound like a negative thing, it may not be.

Two benefits:

A second mortgage (typically a home equity loan or line of credit) has a lower interest rate than most credit card companies
Interest paid on a second mortgage is almost always tax-deductible under US tax code

What you need to look at is the total of the payments you make on the credit cards now compared to the payment on the second mortgage. It may be close to the same figure bit, in many cases, is much lower.

Should I use the equity in my home for debt relief?

Home equity used as debt relief is another viable option that exists. Equity is the difference between the home’s fair market value and what you still owe. This equity can be used for paying off your higher interest debt.

Home equity loans are closely related to second mortgages. The difference is that with a second mortgage, the equity on the first mortgage is still intact.

Again, a home equity loan will probably have a lower interest rate than a credit card company. For this reason, using a home equity loan for debt relief can be a smart financial maneuver.

The What-Ifs

The biggest detail you should be watching is the impact the loan will have on your financial position. Look at the possibilities, such as:

What if my income drops or dries up?
What if I get sick and can’t work?
Will the new payment I am incurring strain our situation?

Income is a funny thing. Jobs come and go, people get sick or die and layoffs happen. This is a sad but true fact. Try to see the long term effect of your actions in these situations.

If you are using home equity or proceeds from a second mortgage to pay off credit card debt, you should absolutely not run up those cards again while paying this responsibility. That would land you in a worse situation than you started out in.
If you don’t have the discipline to simply not use the credit cards, cut them up and throw them away. Until you get your current debt paid down or paid entirely off, it is important not to incur more new debt in the meantime.

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