Should I consolidate credit card debt in a second mortgage

The argument for consolidation is that it will reduce interest costs. The interest rate on a second mortgage is usually well below rates on credit cards, and mortgage interest is also tax deductible. The savings can be substantial.

Consolidation, however, has important disadvantages that should be carefully weighed in making a decision. Perhaps the most important, at least for some borrowers, is that consolidation converts unsecured debt to debt secured by your home. If a financial reversal in the future makes it impossible to service credit card debt, you can stop paying. You will lose your good credit rating, but if you can continue to service your first mortgage, you won't lose your home.

Another disadvantage of consolidation it that the new second mortgage may hamper your ability to refinance the first mortgage if a profitable opportunity to do so appears. When a first mortgage is paid off, an existing second mortgage automatically becomes a first mortgage. This makes it impossible to replace the old first mortgage with a new one unless the second mortgage lender provides the refinancing lender with a written statement indicating a willingness to subordinate the second mortgage to a new first mortgage. Many second mortgage lenders will do this, charging fees that range from nominal to extortionate, but some won't do it at all.

If you are paying for mortgage insurance on your first mortgage, adding a second mortgage will probably extend the period over which you must pay. Under prevailing rules for terminating mortgage insurance, the balance of the first mortgage must be paid down to a lower level if there is a second mortgage (see "How do I cancel private mortgage insurance?").

If the second mortgage results in your total mortgage debt exceeding the value of the property, you may lose your mobility. Suppose you are offered a better job in another city that would require that you relocate. If you owe $120,000 on a $100,000 house, selling the house means finding $20,000 in cash to pay off both mortgages. If you can't find the cash, the only way to relocate is to default, which would prevent you from buying a house in your new location. I have received a number of letters from people who have found themselves in exactly this situation, asking whether they can transfer the second mortgage to a new house! Of course, they can't.

Finally, consolidation that results in lower monthly payments can tempt short-sighted borrowers into building up their credit card balances all over again. This is why I advise borrowers who are not dissuaded by the arguments against consolidation, to avoid a large drop in the monthly payment. Shift the second mortgage to 10 or 15 years, whichever provides a total payment close to the one you have now. With the lower rate and short term, you will at least have a fighting chance of becoming an equity-builder rather than a credit card junky.

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