Did you take on a second mortgage to either buy your home or consolidate debt? Maybe you accepted whatever interest rate was available at the time because you were desperate. Now that you are a few years into it, you want to pay the debt off faster. What’s the best way to do so?
While it won’t’ be easy, there are ways that you can eliminate that second mortgage faster than originally planned.
Make Extra Payments
If you have extra money each month, consider putting it towards the principal balance on your second mortgage rather than into savings. While it’s nice to have funds set aside for a rainy day, if the interest on the second mortgage is killing you, it’s time to get rid of it.
You can either make small extra payments each month to consistently pay the debt down or you can make one large payment. Some consumers use their income tax refund to pay their second mortgage balance down. This way they pay a large chunk toward the balance and cut some time off what it will take to pay the loan off in full.
Refinance your Second Mortgage
If you have decent credit, you may want to refinance with a cash-out refinance and combine your first and second mortgage. This will depend on your CLTV or the combined LTV of the two mortgages, though. Some second mortgage lenders allow higher LTVs than your traditional first mortgage lenders will allow.
Generally, you can borrow up to 80% of your home’s value with a conventional loan and 85% with an FHA loan. If you have a VA loan, you can borrow as much as 100% of your home’s value. If this leaves you room to consolidate the mortgages into one, you may save on interest charges. First mortgages typically have lower interest rates than second mortgages do. Be careful though, as this could end up extending your loan’s term. Determine how much time you have left on your first and second mortgage and try to find a new loan with a similar term to avoid extending the time it will take to pay off the loan.
Make More Frequent Payments
If you are able to, make bi-weekly payments to your second mortgage. Rather than paying the full amount each month, pay half of the mortgage amount every two weeks. While this sounds like it turns out to be the same thing, you actually make 13 annual payments rather than 12 payments this way.
Here’s how that works. If you make a payment every two weeks, you make 26 bi-weekly payments. This means you pay half of your mortgage 26 times. That turns into 13 full monthly payments. You could shave a few years and thousands of dollars in interest off your loan by using this method.
Refinance Your Second Mortgage
If you don’t have the ability to consolidate your first and second mortgage, you may try refinancing just your second mortgage. If your credit, debt ratio, or any other qualifying factors have changed since you obtained your second mortgage, you may have a better chance of securing a lower interest rate.
This only works if you’ve made your financial situation better, though. For example, if you’ve paid off a lot of debt and it increased your credit score, you could be eligible for a better interest rate. This could help you save money over the life of the loan. Just make sure you watch how much the refinance costs you to make sure it still makes sense.
Getting rid of an expensive second mortgage doesn’t have to feel impossible. You have options; you just have to think outside of the box. You may not want to jump straight to the refinance option if you can help it because that will cost you money. If you can make extra payments toward the loan without refinancing, go for it. If you can’t, refinancing is always a solid option to help you lower your housing costs.