Second mortgages: the pros and cons

A second mortgage, also called a home equity loan, involves borrowing money against the portion of your home that you own. To put it simply, if you have a $350,000 mortgage on a home you bought for $400,000, you have $50,000 of equity and may be able to use some of it to consolidate debts or finance a project. Here are the pros and cons of doing so.

Pros
A common reason for taking out a second mortgage is to consolidate debts with a loan that has a lower interest rate, thus saving money in the long run. In addition, it offers flexible payment arrangements, as you can also negotiate for a longer or shorter amortization period, which is the length of time you have to repay the loan.

Cons
The interest rate will be higher than that of your first mortgage. In addition, you need to have enough equity to cover the entirety of the debts you mean to consolidate.

The most serious downside, however, is that paying off credit card debt with a second mortgage means transforming an unsecured debt into a secured debt by putting your home up as collateral. If you fail to make your payments, the bank may be entitled to foreclose on your home.

Before applying for a second mortgage, speak with your financial adviser. If you’re struggling financially, it may also be a good idea to seek debt counseling to assess whether a second mortgage is the best option.