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Comparing Second Mortgage Loans
Second Mortgage Loans with Fixed Interest Rates for Paying off Revolving Accounts
Home equity loans, also known as second mortgages, continue to be popular for fixed rate debt refinancing because they know they can save money if they refinance high rate credit cards. Some financial experts argue that by getting a second mortgage to pay off revolving accounts you are turning unsecured debt into secured debt. What these people don't consider is that defaulted unsecured debt can be secured against real property very quickly once the debtor is sued for it and a judgment is received.
The other point to consider is that credit card debt is adjustable rate debt with compounding interest. Compounding interest is interest that is calculated not only on the original principal, but also on any unpaid interest that has been added to the principal. On top of that, if you've been even ONE day late, you may be paying what's called a universal default rate. This is a penalty interest rate that can amount up to 30%, and when that rate compounds, your balance could skyrocket even though you're making regular monthly payments.
Even at typical rates of 16% to 21%, it could take 15 to 22 years to pay off your credit cards. When you consider that a typical fixed rate second mortgage loan term is 15 years, you're not trading your old debt into one that will take longer to pay. It could very well take less time to repay your second mortgage than your credit card debt. And, you probably will be paying less per month because not only is the interest rate for a second mortgage (currently between 7.7% and 8.19 percent according to the New York Times Home Finance Center) significantly less, but it is also simple interest. Simple interest, unlike compound interest is calculated only on the principal sum. Thus, simple interest is more stable than compounding interest.
While the rates for second mortgages has risen quite a bit recently, according to Interest.com, the Fed's rate-setting committee has not raised rates since June 30, 2006 and it is not expected to. They further state that economists now believe the committee will stand pat well into the spring. So, now may be the time to consider second mortgage debt consolidation loans if your credit card debt has spiraled out of control.
If you're worried about not having enough equity, there's no need because there are second mortgages for home owners with no equity like the 125% second mortgage or no equity 2nd mortgage. For these loans, you just need to find a mortgage broker that offers no equity second mortgages. Some people argue that a home equity line of credit (HELOC) is cheaper to get than a fixed rate second mortgage. But, they are variable rate loans, and rates change quickly. The rates for a fixed rate second mortgage stay the same through the life of the loan, so you save more in the long run.
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