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If you are considering debt consolidation solutions, then you have probably found that your loans and credit cards are too expensive to handle. Taking out a second mortgage loan is among the possible options for consolidation. As a loan that is secured with a house, it can potentially reduce the interest rate you are currently paying.
The Mortgage Reduction:
When it comes to interest rates, a mortgage is among the lowest available. A mortgage is secured with a house or similar property. As a result, the interest rate is much lower than other types of debts. Depending on personal credit scores and the current market conditions, mortgage rates as low as 6 percent are not uncommon.
Using a second mortgage as a form of consolidation might seem to make a great deal of sense. Depending on the particular debts, interest rates on unsecured loans or credit cards can easily range from 15 to 30 percent. Most credit cards have an interest rate around 20 percent even when individuals have excellent credit ratings.
The reduction from those high interest debts to a second mortgage can seem like a significant figure. Dropping interest charges from an average of 20 percent to a total of 6 percent means a high savings potential.
Debt Trap Problem:
While the second mortgage might seem like the ideal solution, for most individuals, it creates a debt trap that only digs a deeper hole in the future. A consolidation loan with a second mortgage does not face the key issues relating to unnecessary spending or living within personal means.
Taking out a second mortgage does not require talking to a professional about managing personal finances, freezing any debts or closing any accounts. Those credit cards remain open and active, leading to the temptation to spend on the cards instead of spending with cash.
The result is a debt trap. A new loan is formed with a house securing the debt, and the original revolving accounts are still accessible so that you are still spending above the amount earned each month. The problem is that when the credit cards build up again, the debt is much larger than the original debt.
Secured Debt Issue:
Beyond the risk of building up overwhelming amounts of debt, you will also have the potential risk associated with a secured loan. If the second mortgage is not paid, then you are likely to face a foreclosure and lose the property. This is not a possibility when dealing with unsecured loans because the lender does not have access to that property.
In many situations, consumers end up facing bankruptcy or foreclosure because the debts mount too high to manage after using a second mortgage for consolidation. As a general rule, it is best to avoid consolidating with a secured loan due to the potential risks associated with the new debt.
Negotiation and Settlement:
Instead of taking out a second mortgage for debt consolidation, consumers should consider negotiating with the creditors to settle the accounts instead. Settling will avoid losing a home and ensure that the debts are reduced within a 24 to 48 month period of time. Furthermore, working with professionals will help you learn how to budget and manage your personal finances to avoid debt build up in the future.
Negotiation with the creditors involves a discussion of the situation and a request to reduce the amount of money owed on the account. The creditors will often take time before they agree to any changes, and it is best managed by a professional due to the depression or disappointment associated with initial rejections.
In many cases, settling the account is the best solution. Settlement involves providing the creditor a lump sum of cash that is a portion of the remaining principal. The creditor agrees to take the reduced cash value because the full amount is paid at once. After making the single lump sum payment the remaining debt is forgiven.
Settlement differs from consolidation because it is designed to impact the principal of the debt instead of just the APR. When consumers pay the full amount of the agreed upon lump sum, the debt is considered paid. As a result, settling the account will work on reducing the debt at a much faster rate than consolidating the loans or credit accounts.
Negotiation and settlement are a better method of consolidation than using a second mortgage loan. It is safer financially to discuss the situation and get help than to use a secured loan for unsecured debts. Furthermore, it avoids the risk of digging a bigger debt in the future.
Anyone who is considering consolidation options should call us or fill out the form. We provide a free debt analysis and help you determine the options that best fit your personal situation. Whether you need to settle or consolidate, professionals are available to assist you.