Can a Second Mortgage Holder Foreclose?
If your home is worth more than the mortgage, you can turn that value into cash. Second mortgages -- known as home equity loans or home equity lines of credit -- borrow against equity, the value of your home unencumbered by a mortgage. There are benefits to taking out a home equity loan, but there is also a risk your second mortgage holder could foreclose.
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Second Mortgages
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Taking out a second mortgage can provide you with cash at a lower interest rate than credit cards or other consumer loans. In addition, the interest is tax deductible, like first-mortgage interest. The closing costs of the loan -- often several thousand dollars -- will eat into the loan amount, however. Another drawback is that unlike credit-card bills, the money you borrow with a second mortgage gives the lender a claim on your home, according to the Nolo legal website. If you default on the debt, your lender can foreclose.
Foreclosure
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Although your second-mortgage lender has the right to foreclose, doing so poses problems the first-mortgage lender doesn't have. Regardless of which lender launches the foreclosure, the foreclosure sale will pay off your debts in order of seniority. Your home equity lender won't see any money until after the full payoff of your primary lender. Sometimes the second mortgage holder will solve that problem by buying out the first mortgage and becoming the senior lien-holder.
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Deficiency
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Depending on your state's laws, foreclosure may not end your second-mortgage problems. If the foreclosure sale doesn't pay off your home equity loan, some states allow the lender to sue you for a deficiency judgment covering what remains of your debt. The Bills website states, however, that as the debt is now unsecured -- you no longer have a house for collateral -- it may be easier to negotiate or settle it.
Solutions
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Filing Chapter 13 bankruptcy can sometimes eliminate a home equity loan. If your house is worth less than the first mortgage, you can ask the judge to declare the second mortgage is now unsecured. You have to pay secured debts in Chapter 13 if you want to keep the collateral. You can wipe out unsecured debts after several years of payments. If your second-mortgage lender knows you're considering bankruptcy, and that you genuinely can't pay, you may be able to negotiate a partial payment to eliminate the debt.
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