Did you take out a second mortgage out of desperation? Maybe you found yourself in a bind and took the first loan that came your way. Now that you are out of that financial crisis, you wonder what to do with this high-interest rate second mortgage.
The good news is that you aren’t stuck with it. You are going to have to do some legwork to get rid of it, but we’ll walk you through the process.
Refinance your Second Mortgage
The easiest way out of a high-interest rate second mortgage is to refinance it. When you refinance, you pay the loan off and take out a different loan. You can do this in one of two ways:
- Pay off only the second mortgage – If rates have dropped since you took out your second mortgage or you are in a better place financially, just refinance the second mortgage. Find a lender with better terms and/or interest rates than you have now and take advantage of the savings.
- Take out a cash-out refinance –If you have enough equity in your home, you may be able to wrap both your first and second mortgage into one loan. Cash-out refinance loans often have affordable interest rates and you have the benefit of just having one loan. You can usually borrow up to 80% of your home’s value with a cash-out refinance, so make sure you have enough equity.
If you can’t refinance your mortgage because you don’t qualify or don’t have enough home equity, you can use the following steps to get out of your second mortgage.
Pay the Balance Down
One way or the other, you need to pay your second mortgage off. If you just make the minimum payments, it will take you as long as the loan’s term, which could be between 10 and 30 years. If you want to pay it off sooner, you need to pay the balance down faster. You can do this with any of the following methods:
- Make extra payments – Did you get a tax refund or a work bonus? Put the money toward your second mortgage. Do you have a few extra dollars at the end of each month? Put it toward your second mortgage. Any money you have that you can pay toward the loan’s principal can help you get out of your second mortgage faster, which decreases the amount of interest you pay.
- Pay your mortgage bi-weekly – You can turn your monthly payment into bi-weekly payments and pay your loan off sooner. All you have to do is split your regular payment in half. Pay one half one week and two weeks later, pay the other half. Essentially, you still pay the same amount each month, but at the end of the year, you end up making 13 monthly payments rather than 12 payments. This helps you pay your loan off faster as the extra funds go toward your principal.
Combining the Strategies
You can actually combine these two strategies for the ultimate savings. Start by paying your second mortgage down as much as possible. Whether you regularly make extra payments or just do so when you can, you’ll pay the balance down faster. Once you are a the point that both mortgages combined are less than 80% of the home’s value, you can pay off the second mortgage with a cash-out refinance or refinancing the second mortgage.
Does Refinancing Make Sense?
Before you refinance, you should know how to tell if it makes sense. If you’ll move in the near future, it may not make sense. Refinancing costs money. Before you choose this step, figure out your break-even point. This is the point that you’d pay off the closing costs with the savings of refinancing. After that point, you’ll realize the savings. If the break-even point is too far ahead, refinancing may not make sense.
Your break-even point is:
Total closing costs/Monthly Savings = Break-even Point
Let’s say you have closing costs of $3,000 and refinancing will save you $150 per month. Your break-even point would be:
$3,000/$150 = 20 months
After 20 months, you’d realize the saving of refinancing.
Getting rid of a high-interest rate second mortgage isn’t hard, but it does take some work. Figure out what works best for you to take the steps to get out of your second mortgage. Don’t assume the high-interest rate is yours to keep – do the work to save as much money as you can. It may even save you thousands of dollars.Click to See the Latest Mortgage Rates»