If you owe a significant amount of high-interest debt, one way to pay off that debt quickly is to take out a second mortgage on your home. Using a second mortgage to pay off debt can be a good idea if you’re facing high-interest credit card debt. But when is taking out a second mortgage to pay off debt a bad idea? We’ll explore that and more in this article.

A second mortgage is exactly that: another loan on a property on which you already have a mortgage. Just as it does for the first mortgage, your house serves as the collateral for the second mortgage. This means that if you fail to repay the second mortgage, you risk the loss of your home. A second mortgage gives you all the money in the form of a lump sum payment, and interest accrues on the entire amount immediately. You’ll also need to repay a second mortgage each month.

How about a home equity loan? Should you take out a home equity loan to pay off credit cards? Well, since a home equity loan is the same thing as a second mortgage, the answer is yes, if you owe a lot of money on high-interest credit cards. Thus, taking out a home equity loan, a second mortgage, to pay off credit cards is wise if it will save you from paying a significant amount of interest. 

Taking Out a Second Mortgage to Pay Off Debt: A Word of Caution

One important thing to remember is that there are usually closing costs associated with a second mortgage, so make sure that the interest you are going to save by paying off those credit cards or that high-interest debt is significantly greater than the fees and closing costs associated with a second mortgage.

Also, a second mortgage is the same as a home equity loan, but it is not the same as a home equity line of credit (HELOC). A home equity line of credit takes, like a mortgage, your home or property as its collateral. However, instead of a lump sum payment, a home equity line of credit functions as a revolving line of credit does. You can withdraw the funds when you need them, and the lender charges you interest only on the amount of money you withdraw (you can take out as much or as little as you prefer). 

A second mortgage should also not be confused with refinancing. Refinancing your mortgage means that you apply all over again for a new mortgage, which involves verifying your family income, your employment, and your debts and getting your home reappraised. Refinancing a mortgage is basically like redoing a mortgage. 

A second mortgage on your home will carry a higher interest rate than the first mortgage because there is a greater amount of risk for the lender who offers you the second mortgage. This is due to the fact that if you happen to default on the mortgage, the first mortgage will be the first to be paid off, and then any remaining money will go toward that second mortgage. 

Should I Take Out a Second Mortgage to Pay Off Debt? The Bottom Line

So is taking out a second mortgage to pay off debt a good idea? Honestly, it depends on how much you owe and how much interest you’re paying. If you are being charged a significant amount of interest (like with credit card debt, an unsecured line of credit, a car lease, etc.) and you owe a substantial sum of money, then it can certainly be worthwhile. 

But you should carefully consider the fees and potential closing costs of a second mortgage and see if the money you will save on interest from the debt that you intend to pay off substantially outweighs those second mortgage fees (as well as the interest charged by the second mortgage. 

If you owe a lot of money on high-interest store cards or credit cards, you should also consider that taking out a second mortgage to pay off those credit cards will not only save you money in terms of interest but will also help to raise your credit score. With a better credit score, you will be qualified for financial products which will have more favorable terms, such as lower interest rates. 

You can use money from a second mortgage for pretty much anything. You can use it to pay off high-interest debt, cover expenses that may have come up unexpectedly, pay for a wedding, etc. Just make sure that you are always able to pay that monthly mortgage payment because the last thing you want to do is to default on either your first mortgage or your second mortgage and risk losing your home. 

Frequently Asked Questions

Can you take out a second mortgage to pay off debt?

You can definitely take out a second mortgage to pay off debt. This can be a good way to save money on interest, especially if you have a lot of credit card debt. The interest rate for a second mortgage may be higher than that of the first mortgage but is still lower than credit card interest rates as well as car lease interest rates and the interest rates for unsecured lines of credit. 

Is it hard to get a second mortgage?

It depends. It is more difficult to get a second mortgage from a big bank or a trusted company, which will usually take several days. A big bank will require you to have good credit (a score between 650 and 900), and a trusted company will require you to have a score between 550 and 700. Trusts and big banks are less likely to approve you for a second mortgage because it carries more risk than the first mortgage, even if your mortgage payment history is without reproach. Also, big banks require you to build up at least 25% equity in your house, so if you have not yet met this requirement, you will not be able to get a second mortgage from a big bank. A trust company will require you to have at least 10 to 15% equity already built up in your property. 

It is definitely easier to get a second mortgage from a private lender because a private lender will usually approve you within 24 hours or less. Also, a private lender can approve a second mortgage for you even if your credit score is below 600. Furthermore, even if you don’t yet have 25% equity built up in your home (or even 10 to 15% equity), a private lender will still be able to offer you a second mortgage. This is because they don’t face the same regulations as major banks.

How much money can you borrow on a second mortgage?

The amount of money you can borrow on a second mortgage depends on the appraisal value of your property as well as the balance you owe on your first mortgage. You can borrow a maximum of eighty percent of your property’s appraised value subtracted by the balance on your primary mortgage. 

Can you use a second mortgage to pay off the first mortgage?

You can do this, but it is not generally advisable. The second mortgage will always have a higher interest rate than the first mortgage, so if you use the second mortgage to pay off the first mortgage, you will still owe the same amount of debt on your house, but you will be paying more interest on that debt. Taking out a second mortgage to pay off debt is most worthwhile and will save you the most money when you are paying off debt that charges a much higher interest rate than the second mortgage does, such as credit card debt or unsecured loan debt. So, while taking out a second mortgage to pay off the first mortgage may not be such a good idea, taking out a second mortgage to pay off credit cards is a good idea that will save you a lot of money in the long run.