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Saving Your House Illustration

Back during the real estate boom, many homeowners found second mortgages a convenient and relatively inexpensive source of a loan. However, when the market dropped, many people found themselves “underwater” and unable to sustain their payments. One of the major reasons for filing bankruptcy has been the ability to escape the burden of the second mortgage payments.

If you have a second or third mortgage, you may be able to eliminate second and third mortgages while keeping your home.

Before we discuss how we can help you remove a second mortgage, let’s discuss what a second mortgage is and why people often turn to them to help ease financial issues.

What is a Second Mortgage?

A second mortgage is literally what it sounds like. It’s a mortgage lien on your home in addition to your primary mortgage, which is also a lien on your home.

A lien is defined as a right to keep possession of property belonging to another person until a debt owed by that person is discharged. When you have a lien on something, that means you have a right of possession to that thing. When the debt is fully paid, then the lien is released.

When you take out a mortgage, the lienholder is the bank or lender that gives you the mortgage loan to buy the house. The lien will then be released by the bank or lender once you have paid off the amount you owe.

A second mortgage often takes the form of a home equity line of credit (HELOC) or a home equity loan (HELOAN), and can range in size from $10,000 to $500,000 or more.

Reasons for Second Mortgages

There are a number of reasons why you might want to take out a second mortgage on your home, including:

having cash available if there is an emergency such as a job loss or illness
you have a good mortgage rate on your first mortgage and you do not want to refinance (we’ll talk more about refinancing later)

Interest Rates and Second Mortgages

If you default on your first mortgage and the house is foreclosed on, the lien (a bank or lender) on that first mortgage has first claim against any money that is recovered from an auction of your home.

Basically, the first lender has the first right to any money. Only once the first lien holder is paid can a second mortgage lien holder be paid. This is often why second mortgages are called “junior liens” or “subordinate liens” for this reason.

This is also the reason why interest rates on a second mortgage will be higher than interest rates on a first mortgage. Often times several percentage points higher.

A second mortgage can either be fixed-rate (often called Home Equity Loans) or adjustable-rate mortgages (ARM).

Home Equity Line of Credit

Second mortgages can also be available as a Home Equity Line of Credit (HELOC).

This is an adjustable-rate mortgage (ARM) which functions more like a credit card in that a homeowner is given a maximum credit line, a debit card, and checks for spending. When the homeowner purchases something, that amount is then added to the credit line’s balance. It’s important to note that interest also accrues.

The interest rates are based on the Prime Rate, which is the Fed Funds Rate plus three percentage points.

Are Second Mortgages a Good Idea? Maybe, Maybe Not

A second mortgage can be helpful because it allows you the opportunity to access the equity in your home without having to break the first mortgage. It also provides you with a line of credit should you need extra money as the result of a job loss or illness. It can be a good short-term financing solution and all other avenues have been exhausted. Still, it needs to be considered for what it is – an additional lien on your home. For that reason, it’s advised that you refinance your first mortgage.

Carolyn Secor P.A. focuses its practice in the areas of Bankruptcy and Foreclosure Defense in Clearwater, Florida. For more information, go to our web site or call 727-335-7151.