Going in for a second mortgage maybe a bad idea.

If used properly, they are a great way to pay off high interest debt. Plus the interest may be tax deductible.

Of course, any increase in debt is bad. Also, unlike credit card debt, your house now secures your mortgage. If you fail to pay your credit card, your credit rating suffers. But if you fail to pay your mortgage, the bank can foreclose on your house. As long as you are capable of making the payments, you are smart to take debt at a lower interest rate. The tradeoff is that your assets are now at risk.

Well, many people do take out the second mortgage to consolidate debt. That’s fine. The problem is that then they spend with their credit cards again and get back in the same situation except this time, they have a lot more debt than before.

Additionally, one must beware of the equity refinancing trap. Many a times, people who think that they have “paid off” their cards — which isn’t really paying off at all, but refinancing — only to charge up their cards again, because they’re still overspending. So then they’re even deeper in debt than before they started. If you haven’t changed the habits that got you in debt to begin with, refinancing your debt won’t help you.

If you have quite a few working years ahead of you and feel you can pay the second mortgage off, it might be a good idea. If you are nearing retirement, it might not be a good idea.

Few things to remember: Shopping for a HELOC is very different from shopping for a standard mortgage. In most respects, it is simpler, if you know what you are doing. Do not assume that the difference between your HELOC start rate and the prime rate is the margin. It may or may not be. Ask. Bear in mind, as well, that the margin varies with credit score, ratio of total mortgage debt to property value, documentation and other factors.

You need the margin on “your” deal, not the margin they are advertising which is their “best deal.” Further, the processing fees and payment for services after taking into account the times you defaulted if ever, over the previous loan may considerably lower the total amount of second mortgage that will be available to you.

The biggest drawback to second mortgages is ironically also its strength. Because lending institutions are more than happy to provide you with as much home equity cash as you want, borrowers tend to tap more than they need. This can put you in a real pickle if you decide to move or if interest rates increase.

So take only what you need, and make sure the monthly payment works for you.


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