A high-rate second mortgage can be an expensive bill for you month after month. The good news is that there are several ways to either pay it down or get rid of it altogether, depending on your motives. The first thing you need to consider is how long you plan on staying in the home. Is this your “forever” home or do you see yourself moving in a few years? Based on these answers, you can decide the next step for you.
Refinance out of the Second Mortgage
The most common way to get rid of a costly second mortgage is to refinance out of it. This will depend on a few factors, though:
- The value of your house
- The amount of your first and second loan put together
Do you have enough equity in the home to refinance? If the first and second loan on your home combined total 100 percent or even more, if the value of your house dropped recently, then refinancing might not be an option. Another time when refinancing might not be the right choice is if you do plan on moving in the near future. Refinancing comes with expenses, which you will not recoup in just a few years.
If, however, you plan on staying and you have enough equity in the home to refinance, it could save you plenty of money every month. If you plan to go this route, make sure you shop around. If you time it right and are able to get a low enough interest rate for the new consolidation loan, you could end up saving money every month, even on the first mortgage. If your new payment decreases enough that it is lower than your first and second mortgage payments put together, you can either pay more money towards the principal every month to get your mortgage paid down or use the money elsewhere – the choice is yours.
Refinance the Second Loan
You can also try to refinance your second lien into a lower interest rate. If you do not have the ability to refinance into a consolidation loan, chances are you could find a second loan that has a lower interest rate than you have now.
Second mortgages are often offered by different lenders than your mainstream conventional lenders, so shop around for different programs. The interest rates on second liens are always higher because they pose a higher risk than a first mortgage, but there are many programs to choose from. If you shop around with different lenders, you can see what is available to you and make a decision from there.
Pay the Second Mortgage Down
If refinancing is not an option for you either because you are moving in the future or you do not have enough equity in the home to qualify, you can always pay the second mortgage down on your own. This is done simply by making extra payments towards the principal of the second loan. You can do this several ways:
- Pay a few extra dollars towards the principal on a regular basis – If you choose this option, make sure the lender knows that the extra money should go towards the principal. Whether you pay your mortgage online or via mail, there is usually an option to click or write that you want to pay extra towards the principal.
- Make biweekly payments – If you are in a position to make biweekly payments, you could make a full extra mortgage payment every year. This strategy simply requires you to pay half of the full mortgage payment every two weeks. This way you make a full payment each month, but you cut the amount of interest you pay down drastically since you pay towards the principal more often. You should always check with your lender to make sure this is allowed for your program before you start, though.
Paying extra towards the principal, whether on a random, regular, or biweekly basis is a great way to get that principal down. When you cut years off of your mortgage term, you can get out of the second mortgage faster.
If you are in the situation where you do not have enough equity in the home to refinance and consolidate the loans, you could use this strategy first and then once your principal is down enough that you can refinance with the first loan, you can eliminate the second lien altogether.
Having a high-interest second mortgage does not have to continue to overwhelm you month after month. Instead, find ways around this payment to help you make it lower. If you are incapable of refinancing at all, making regular extra payments is the next best alternative as it helps you pay less interest over the life of the loan and pay the loan off faster, getting it off your back.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.