If home is where you “hang your hat,” then it can also be a good starting place for consolidating debt or financing costly home improvements. Many homeowners find themselves so swamped in debt that they fail to see the literal value of their homes. If you have home equity and need a loan, using a second mortgage may be your best option.

What a Second Mortgage Is

A second mortgage is a loan secured by property (yours) that already has a mortgage on it.

How a Second Mortgage Works

If you bought your home for $100,000, and have paid $20,000 toward the principal, then you have earned $20,000 worth of equity. This is one of the key figures—besides an updated home appraisal—that lenders use to determine how much you can borrow.

Downfalls of Second Mortgages

Second mortgages are a great way to consolidate other loans or make finance home improvements, if you keep a couple of things in mind:

• Almost 80% of people who consolidate debt end up incurring the same amount of debt—again.
• Second mortgages are secured debt. If you default on the loan, your lender can foreclose on your home.
• Lower interest rates aren’t a given. Has your credit score dropped because of missed or late payments? Read the fine print to make sure that your loan offers interest rates that are competitive with your current ones.
• If you sell your house, you will have to repay the second mortgage in full—in addition to your current mortgage.

Benefits of Second Mortgages

Using home equity to relieve financial stress does have its advantages. However, there are even more benefits of using home equity loans to consolidate debt:

• Because second mortgages can be spread out over many years, your monthly payment can drop significantly.
• Second mortgages are tax deductible.
• Interest rates are usually lower than other types of loans, since your home is collateral.
• If you don’t rack up additional debt—a second mortgage is an easy and affordable way to pay off unwanted debt at a steady pace.

Anyone who has ever used a second mortgage to consolidate other debts and loans knows that home is not just a physical shelter—it can be a financial one as well. Without a doubt, second mortgages are a great way to keep all your debt under one roof. They aren’t a bad way to repair it, either.