Barry Byers asked:




Second mortgage. The term used to have negative connotations - people with a second mortgage were assumed to have extreme financial difficulties and poor money management skills.

That perception has changed for many reasons. Housing prices have reached record levels. The price of fuel for cars and home heating has gone through the roof. Even food prices have jumped substantially over the past couple of years.

All of that would be manageable if incomes had kept pace with price increases, but they haven’t. The end result is that a lot of families are struggling, even those with “good” salaries.

Rather than being seen as a failing, a second mortgage is now seen as a sound strategy for getting one’s financial house in order.

How Debt Consolidation Works

Many people today are faced with multiple debts. Here is a typical example. In addition to a monthly mortgage payment, people may have a car payment and personal loan and credit card debt, each requiring monthly payments of their own. Even keeping track of these payments can be problematic.

Debt consolidation is, as the name implies, a way of clearing all of these smaller debts so you are left with one sum, payable as one monthly payment.

You may be familiar with one version of consolidation currently offered by some credit card companies. Here’s the deal: they offer a time-limited low interest rate when you transfer the balance from one or more of your existing credit cards to their card. The theory is that you will be able to reduce the amount of interest you pay each month.

The only problem with that strategy is that even their lower rates can be high, and with the average deal being available for only about 6-9 months, you need to get your debts paid off quickly. Plus, there may be an annual fee which further erodes your savings.

A second mortgage, on the other hand, provides you with the money you need at interest rates more in line with standard mortgage rates. Imagine paying 6% interest instead of the 12%-18% that banks typically charge for a credit card.

How Second Mortgages Work

If you have equity in your home, you can take out a second mortgage to borrow against that equity.

Equity is the difference between your current mortgage debt and the current appraised value of your home. Let’s say you have $25,000 equity in your home. You could borrow that amount through a second mortgage and use it to pay off $25,000 worth of debts.

Instead of your personal loans and credit card debts continuing to accrue large interest charges, you can pay them off and be left with a low-interest mortgage payment instead of all of those individual, high-interest debts.

Conventional wisdom states that because a second mortgage entails slightly more risk for the lender (it is paid off after the first mortgage in the event of a foreclosure), the interest rates are higher than for a primary mortgage. While that may be true most of the time, mortgage brokers can often negotiate lower rates and more favourable terms.

If you need assistance with your debts, a second mortgage may be the answer. Speak to your mortgage professional and financial advisor to learn more.

Tom

KristinaRM asked:


Due to family health issues my husband and I have missed a bit of work over the past 9 months. Because of this a few of our credit card payments were missed and we have fallen quite behind. We are now both back to work full time and are making arrangements with our creditors to try to lower our monthly payments. I have not contacted our mortgage company yet to see what they offer because I am not savvy enought to know the difference. In this situation, which would be better?

MALCOLM