Second Mortgages Losing Luster as Debt Consolidation Tools |

There was a time when homeowners took out second mortgage loans for debt consolidation purposes. They’d take out the loans and then use the cash to pay down their high-interest credit card debt. This made financial sense: Second mortgages came with far lower interest rates. Borrowers were swapping expensive debt for cheaper debt. Today, though, far fewer homeowners are using second loans to pay for debt consolidation. There’s a good reason, too: Too many homeowners have seen their housing values fall dramatically. They no longer have enough equity in their residences to take out second mortgage loans.

All Mortgage Loan Types Down

Actually, consumers are taking out fewer mortgage loans in general, not just second loans. And this is happening at a time in which mortgage loan interest rates are at near historic lows. According to the Mortgage Bankers Association, the average interest rate on a 30-year fixed-rate mortgage loan stood at 4.81 percent as of the first week of June. That’s an incredibly attractive rate, and can mean hundreds of dollars less in mortgage payments each month, depending on what size mortgage loan homeowners take out. But at the same time that rates fell so low, borrowers pretty much ignored mortgage loans. The Mortgage Bankers Association also reported that the number of mortgage applications filed in the first week of June fell 12 percent from the previous week.

Unemployment, Tax Credits a Factor

There are two main reasons why mortgage applications fell so severely. First, the national unemployment rate remains far too high; near 10 percent in early June. People who do have jobs are worried that they won’t have them next month. It’s difficult for these people to commit to the financial obligation of a monthly mortgage loan. They’re wisely choosing to wait to buy homes until unemployment falls. Then there’s the demise of the federal government’s housing tax credits. The first of these credits provided up to $8,000 to buyers who purchased a first home. The second provided up to $6,500 to those who purchased any other home. Real estate experts said that the credits spurred thousands of buyers to purchase homes. The tax credits expired at midnight on April 30, which has resulted in fewer people being interested in purchasing a home.

Other Debt Consolidation Options

As first and second mortgage loan applications fall, consumers are turning to other methods of debt consolidation. Debt consolidation loans are near the top of the list. These loans combine all of consumers’ debts into one monthly payment that they can afford. As long as consumers make their payments, harassing collection calls will stop. Problem is, debt consolidation loans can wreck consumers’ credit scores. They also come with high interest rates.