Welp, we’ve done it — we got our collective credit card balance to exceed a trillion dollars! It’s mind blowing.

If you’ve done your part to contribute to that balance, it’s time to get aggressive about getting it paid off as soon as possible.

Consolidating your debt into a lower interest rate can help you pay it off sooner.

For homeowners, the go-to debt consolidation option is to do a cash-out refinance that pays off all the high interest consumer debt. But most homeowners do not want to touch their interest rate, and rightly so!

The next best option might be a second mortgage.

In this video, I’ll walk you through the basics of second mortgages to help you figure out if it’s a good option for you.

TRANSCRIPT:

I’m getting lots of homeowners reaching out to for help because the weight of a six-figure debt load is getting heavier than they can handle.

A couple of years ago, the solution was super simple – we would refinance their mortgage, take out enough cash to pay off all the high interest debt, and sometimes, still lower their interest rate and monthly payment. The years 2020, 2021, and going into 2022 were an amazing time for refinancing. With interest rates in the 3’s, 2’s and even in the 1s, dealing with debt was no big deal.  I’m not sure we’ll ever see interest rates like that again in our lifetime nor am I sure that we should.

Having said that, I do see rates coming down within the next couple of years, but I think they’ll settle around 4 or 5%, not 2 or 3%. But hey who knows. Either way, that won’t help you if you’re a homeowner overwhelmed with debt right now. If you’ve racked up a lot of consumer debt and rising interest rates are making those payments painfully expensive, but you don’t want to refinance and lose out on your super low mortgage interest rate, you need another solution.

And that’s what I’m giving you in this video. Let’s talk about second mortgages. There are pros and cons to them so please do not make the decision to get one lightly.

First, this option is available if you have enough equity in your home to qualify. So if you bought your home in the last year or two with 5% down, this isn’t going to work. If however, just a couple of years ago you put 20% down, then this might work for you. And you need a decent credit score, I’m seeing most programs require a 660 or 680 FICO, but if you want to maximize the amount you can get from the loan, you’ll need at least 700.

As of right now, I’m seeing programs that allow you to take up to 90% of the value of your home in combined first and second mortgages if you have a 700+ credit score. If your score is 680 then you’re looking at more like 80 or 85% combined loan to value.

So let’s do a quick example that shows you how much you could borrow. Let’s say that your home is worth $1M and you have a 720 credit score. You take out a combined total of 90% of that value in home loans, that would be $900,000 as a combined total of your two home loans. Let’s say that the remaining balance on your mortgage is $750,000. So 900 – 750 is 150, so your second loan has a max loan amount of $150,000.

As for minimums, most programs I see have a minimum second loan amount of $75,000.

But there are fees. There’s origination, title, escrow – all that. There’s another big con besides the fees. That’s risk.

If you’re using a second loan to pay off credit card debt, you’re taking unsecured debt and making it secured. Credit card debt is unsecured because there’s no collateral. There’s nothing that you give to the credit card company in case you don’t pay your balance. A home loan of course is secured by the home itself, so if you don’t pay, the bank takes the house as collateral. So if you’re a homeowner with credit card debt and you can’t pay the debt, they don’t take your home. But if you miss payments on your home loan, they can take your home. So by paying off credit card debt with a home loan, you’re risking your home, in the event that you don’t pay. Definitely something to think about.

But the downsides may be worth it if the second loan helps dramatically lower the interest rate you’re paying for debt. With the Fed raising rates, you’ve probably noticed how your credit card interest rates, and therefore your monthly payments, are going up. I’m seeing people contend with credit card interest rates of 30%. Complete insanity. So if a second mortgage can cut that interest rate in half, or maybe even by two thirds, that could be worth it.

Besides the loan to value issue that limits the amount of money you can take out in a second mortgage, there are also income requirements. The lender for the second mortgage has to be confident that you have the ability to repay both the first and second loan payments as well as all the other debt obligations you have. Roughly, the lender needs the total of your home loans plus monthly debt obligations to be under 50% of your gross monthly income.

This is the part where all that credit card debt may sink your chances of getting a second mortgage to pay off the credit card debt. You might be told that your debt to income ratio is too high because your debt exceeds 50% of your income. But, thankfully, there are some second loan programs that allow you to use the proceeds of the second loan to pay off enough credit card, car debt, and/or personal loan debt that then drops your debt to income ratio down to what qualifies you for the loan. So basically, you don’t qualify for this loan but if you get the loan, then you qualify. A little confusing but amazing. As part of the loan process we give them a list of all the debts that will be paid directly through this loan and then escrow pays those off for you out of the loan funds.

Any time I recommend a second mortgage to pay off consumer debt, I encourage… Well, pretty much insist, that I provide financial coaching to my clients to help strengthen their financial habits. Specifically, that means getting organized and  creating a spending and debt repayment plan. I want to use this moment, of having to take out a second mortgage to pay off huge debt, as the catalyst for changing their relationship with money.

For some clients, this is their rock bottom moment where they realize that they can’t continue behaving with money like they always have or they’re going to get the same result. And maybe it’d be good for business for me if I was just helping people refinance debt over and over, but that’s not what I’m about.

I want to get people out of survival mode with money and stay out, show them that they can thrive. I can’t do that if they’re constantly in consumer debt. So please don’t see getting the loan as the complete solution to your debt. The loan is only a part of the solution. Without coaching that helps you handle money differently, the second loan is only a short term fix, that possibly makes your finances worse off in the long run.

So please work with a financial coach to turn your finances around. After being in debt for so long, it can be hard to remember what peace of mind with money feels like – if you’ve ever had that in your life in the first place – and that’s what I want for you. I know how impossible of a goal that can feel like in this world and economy that we live in, but it’s absolutely available to you.

One last thing I want to mention. Your second mortgage doesn’t need to be with the same company that holds your first mortgage. I’ve had people think that second loans weren’t available to them because the company that did their first mortgage or who’s now servicing their first mortgage doesn’t do second loans. Your mortgage broker or loan officer like myself will shop different lenders for the best programs available to you.

So in the next video, I’ll break down your second mortgage options, including HELOCs and home equity loans, and tell you which one I’m recommending most right now. I’ll see you there.