How to Deal With a Second Mortgage

A second mortgage is a mortgage loan that encumbers title to your home and is subordinate to your first mortgage. Second mortgage loans may also be called home equity loans or home equity lines of credit (HELOC). Second mortgage lenders have the right to foreclose if you don't pay them or if they advance funds to your first mortgage lender.

Difficulty: Moderate

Instructions

Things You'll Need:

• Copies of your second mortgage documents and applicable correspondence
• Contact information for your second mortgage lender
• Paper and pen for taking notes
• Computer or word processor (for writing letters, if needed)
• Access to copy machine and/or computer printer

Preparing to Contact Your Second Mortgage Lender

1. Review your second mortgage loan documents before calling your second mortgage lender. Knowing your mortgage amount, current balance, rates and payment due dates saves time and helps you avoid surprises.

2. Write down talking points, and keep them at hand when you call your second mortgage lender. This helps avoid going off track in your conversation. Clearly state your problem, and ask to be referred to the appropriate department.

3. Avoid missing payments on your first mortgage. If your first mortgage is foreclosed, your second mortgage will be wiped out. Your second mortgage holder will contact you upon learning that you've missed payments on your first mortgage. If you cannot bring your first mortgage payments current, your second mortgage lender may advance payments to the first mortgage holder. The second mortgage holder's decision to do so depends on several factors, including how much your home is currently worth and what you owe on both mortgage loans.

4. Determine how much home equity you currently have. If you owe more on your first and second mortgage loans than your home is worth, you have no home equity. Home equity is roughly the difference between the current value of your home and the total amount of your first and second mortgage loans. You can contact a local real estate professional to get an estimate of your current home value; knowing the approximate amount of home equity can help you in discussing options with your lender.

5. Negotiate with your second mortgage lender. If you have enough home equity (typically more than 20 percent of your home's current value), your second mortgage lender may be willing to advance funds to bring your first mortgage current. If the second mortgage lender advances funds to the first mortgage lender, the second mortgage lender may request immediate reimbursement or may agree to refinance your second mortgage to include any amount advanced to the first mortgage lender.
   Asking your second mortgage lender to refinance for a larger amount or to extend your credit line on a HELOC may help in avoiding this scenario. Refinancing may provide funds for making past-due payments to your first mortgage lender, but it also increases the amount of mortgage debt against your home.

Tips & Warnings

• Understand your situation before calling your second mortgage lender. Be ready to suggest solutions, such as "I get paid next week and can send you two of the three payments I owe." Avoid whining, frustration and anger when dealing with your lenders. Be honest and don't make excuses. Don't promise to pay if you can't follow through.
• Second mortgages (including HELOCs) are mortgage loans. They reduce your home equity, which is risky if your home value decreases. Your second mortgage lender will be notified if you miss payments to your first mortgage lender. Your second mortgage lender may advance funds to pay your first mortgage lender. Failure to repay funds advanced by your second mortgage lender can lead to foreclosure. Increasing your second mortgage amount to repay your first mortgage amount creates more debt and increased risk of losing your home.

Resources

• Federal Trade Commission: Borrowers Beware