Second Mortgage Loans for Hard Times
2nd mortgage loans are helpful for avoiding a foreclosure and consolidating debts.
By Evelyn Hall
Foreclosure has become the nightmare inside the American dream for many homeowners caught up in the sub-prime mortgage disaster. Often, avoiding loan payment defaults and the resulting bad credit requires homeowners to shed as much high-interest debt as possible. Used wisely, a home equity line of credit can be a way to eliminate high-interest debt and a powerful foreclosure prevention tool.
You may think more debt on your home is the last thing you need. But consider this:
Most homeowners struggling to make their mortgage also have other higher-interest debt as well, such as credit cards and auto loans. Paying off that debt reduces the total interest you're paying and frees up more cash to put towards repaying your most important debt - your mortgage.
While refinancing or even taking out a 2nd mortgage can help you tap your home's equity and reduce other debt, there are usually closing costs and fees associated with both options.
Those closing costs and fees actually increase your total debt, even if you use the money to pay off credit cards and other unsecured debt. A home equity credit line allows you to use your equity, but without closing costs or fees. The interest is also often tax deductible.
Also, if you are already behind or overextended, you may have a hard time convincing a traditional lender to give you a 2nd mortgage or refinance your existing loan. Many property owners in those circumstances will turn to a hard money lender. These lenders charge much higher interest rates in return for providing financing to someone who is considered at high risk of default. A home equity line of credit is better than hard money refinancing because it allows you to take advantage of currently low interest rates.
Finally, few mortgages - whether traditional, adjustable rate or interest only - can match the flexibility of home equity credit lines. A HELOC gives you access to your equity, but doesn't require you to withdraw it all at once as refinancing or a 2nd mortgage would. You can use the equity as you need it, leaving what you don't immediately need in reserve.