While there are a number of reasons to have or need a second mortgage, they are not always an ideal thing to have.
In California’s volatile real estate market, many homeowners have found that their home is worth less than the property’s outstanding mortgages. In this situation, if you have a second or third mortgage, you may be able to eliminate second and third mortgages while keeping your home.
RHM LAW LLP is a leader in this type of legal action. We may be able to help you remove that second mortgage, and subsequent mortgage liens. To put it as simply as possible, that debt simply disappears.
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 lien holder 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.
Obtaining a Second Mortgage
There are three ways to obtain a second mortgage:
- When you purchase your home you can ask your lender for a second mortgage
- When you refinance your home you can ask your lender for a second mortgage
- Any other time through a bank
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.
Refinancing Your Mortgage
There are various options available, including refinancing or modification of your mortgage loan with lowering your payment and making it more affordable. For homeowners that have missed payments and find themselves buried in late fees and past-due notices, you might be able to qualify for temporary or permanent solutions that will allow you to avoid foreclosure and also get your financial bearings back on track.
Refinancing
Refinancing means securing a new loan that with a different, and even better interest term rate, new terms, and a new monthly payment. This option completely replaces the previous mortgage. The payment is made more affordable through either lowering your interest rate or adjusting the terms of the loan.
The first mortgage is paid off, which allows the second loan to be created. Borrowers with a good credit history often find refinancing to be a good way of converting a variable loan rate to a fixed rate, while also securing a lower interest rate. Refinancing can be a riskier choice for borrowers with less than perfect, or even bad credit, or too much debt. Refinancing will also not negatively impact your credit activity or history.
Even if the value of your home has decreased or if you are underwater and you owe more than your home is worth, you may be able to refinance your loan.
Home Affordable Refinance Program (HARP)
The government offers the Home Affordable Refinance Program (HARP) to help you refinance. This is a federal program that was created by the Federal Housing Finance Agency in March 2009 to help underwater and near-underwater homeowners refinance their mortgages. There are various places online where you can see if you qualify for HARP.
Typically, you will need to provide the following to see if you are eligible:
- Your most recent income tax return
- Information about any junior lien mortgage on the house
- Account balances and monthly payments for all of your debts
HARP can be a great option for struggling homeowners.
Repayment Plan
A repayment plan is an agreement between a homeowner and the mortgage lender where the homeowner pays the past due amount that is owed. It is used to help resolve delinquency. Typically the past due amount is added on to mortgage payments—over a specified time period in order to bring the mortgage current. Essentially, a repayment plan allows a homeowner to catch up on your past due payments over an extended period of time. This is less damaging to a homeowner’s credit score than a foreclosure and also allows the homeowner to stay in their home while avoiding foreclosure.
Forbearance
A forbearance is when a mortgage company temporarily suspends or reduces a homeowner’s monthly mortgage payments for a specified period of time in order allow a homeowner to get back on solid financial footing. Tax, insurance, escrow, or impound amounts can be suspended for a set period of time, which will help a homeowner stay in their home and avoid forbearance. This option is also less damaging to your credit score than a foreclosure.
Your lender will need to determine if you are eligible for a forbearance, but often that eligibility is based on a loss of income due to a number of things, including: medical illness, death of a co-borrower, natural disaster, or unemployment. All of these circumstances must have a clear end so that the lender can set an amount of time.
Modification
A modification is an agreement between a homeowner and a mortgage company to change the original terms of the mortgage. Terms include: payment amount, length of loan, interest rate, etc. This can help to reduce monthly mortgage payments so that they are more affordable for a homeowner. This is also less damaging to a credit score than a foreclosure.
Home Affordable Modification Program (HAMP)
The Home Affordable Modification Program was outlined in 2009 and provides clear and consistent loan modification guidelines when it comes to the modification of a home. Under HAMP, a loan is modified so that a monthly mortgage payment is no more than 31% of your gross (pre-tax) monthly income. If a homeowner is eligible, the modification permanently changes the original terms of the mortgage.
Qualifications include:
- The homeowner is ineligible to refinance
- The homeowner is facing a long-term hardship
- The homeowner is behind on your mortgage payments or likely to fall behind soon
- The original loan was originated on or before January 1, 2009 (i.e., the date the homeowner closed your loan)
- The loan is owned by Fannie Mae or Freddie Mac – or is serviced by a mortgage company that is participating in the HAMP program.
Chapter 13 Bankruptcy
You can also file for Chapter 13 bankruptcy to obtain complete relief from the second mortgage, and keep your house. After filing, the possibility of foreclosure is removed, the second mortgage disappears, and you have one set of orderly payments to make. You will even be free to re-finance at a lower rate if it becomes available. RHM LAW LLP has helped thousands of people in California obtain debt relief through Chapter 13 and Chapter 7 bankruptcy filings.
Working with an Attorney
If you are unable to keep up with your mortgage payments, you’ll want to contact a lawyer that can help you avoid home foreclosure. It is easy to feel helpless in a situation like this. The right lawyer can help save your home using a number of legal options, including Chapter 13 bankruptcy. At the law offices of RHM LAW LLP, we help the people throughout the San Fernando Valley, Los Angeles, Riverside, San Bernardino and Orange counties to avoid home foreclosure and get the debt relief they deserve. If you need to avoid home foreclosure and you have decided to pursue bankruptcy as an option or home loan modification, we will help you save your home.