Mortgages help people achieve the dream of buying a home. Second Mortgages and Home Owners Lines of Credit can be a trap.
While a mortgage is generally required to but a home, a Home Equity Lines of Credit (HELOC) often prevent people from paying off the loan. Many people use this type of credit to consolidate debt and take advantage of low interest rates and small repayment requirements. On many HELOC’s the payment requirement is just the interest. The principal never gets repaid and the loan lasts forever. Worse yet people continue to spend on their credit card doubling the financial damage.
Second mortgages are often used by individuals whose credit is impaired. The poor credit score results in high interest rates that inflate the overall cost of housing and reduces the amount of money available for other item in the budget. This will drive people to use other types of credit to maintain lifestyle. This erodes the equity they have built in their home while increasing debt load.
Consolidating debt using home equity can be a solution but requires broader plan to limit the use of additional credit and repay the consolidated debt. If there is no plan in place consolidating debt against a house will have limited success and greatly diminish equity in the asset over time.
Before using a mortgage to consolidate debt, seek advice on other alternatives that might provide credit relief and not risk the home equity.