Evaluating if a second mortgage is the right move for you to get out of debt is the right first step to making a financially sound decision. As is the case with any financial decision you make in life, leveraging a second mortgage to consolidate your debts has its “goods” and its “bads.” Gather up the facts and then weigh the pros and cons of this option to see if it is the right move for you.
The first consideration is whether you have enough equity in your home to use a second mortgage to get out debt. You can estimate this by subtracting your mortgage loan balance from the approximate market value of the home. The difference is the amount of equity you have in the home. Lenders tend to loan 80 to 90 percent of the value of the home, minus any other mortgage balance you have outstanding.
A second mortgage is still a debt, so using a second mortgage to pay off and consolidate your other debts is really just reorganizing the debt rather than eliminating it. If you obtain a second mortgage that has a lower interest rate than what you are paying on your other debts, it lands in the positive column. In the long run, you are paying less interest and keeping the difference in your bank account.
You can deduct the full interest payment on a home equity loan or home equity line of credit, the usual forms of a second mortgage, from your taxable income, according to IRS rules as of August 2012. This puts you in a better position than paying interest that is not tax deductible, such as on credit cards, personal loans and car loans. When you use a home equity loan to consolidate this debt, you are turning non-tax deductible interest into tax-deductible interest because you can now write off that amount on your taxes.
While a second mortgage might be a good way of handling debt, assess the root of the problem. If your spending habits are what landed you in the red in the first place, creating and sticking to a budget and spending plan is the primary way to avoid falling back into debt. Otherwise, you might find yourself back where you started even after you have consolidated your debt with a second mortgage.
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