Many people have taken out second mortgages, or home equity loans. There are a variety of reasons that a home equity loan could be advantageous, but it can also be dangerous. Even if you are still making payments on your first mortgage, the lender of your second mortgage can foreclose on your home if you default on that loan.
How Second Mortgage Foreclosure Works
There is a difference between foreclosures on first and second mortgages, however. If your home equity lender forecloses, it is required to pay off the first mortgage once foreclosure goes through. The more equity that you have built up in your home, the more beneficial it can be for your second mortgage lender to foreclose. If there is enough equity in your home to cover both your loans, the lender will be able to pay off the first mortgage and still recover its losses.
If this sounds a bit insidious, it can be. Unfortunately there are some dishonest lenders out there who will lend for home equity loans with more interest in foreclosing than gaining honestly from the loan. The best way to avoid foreclosure on a second mortgage is to avoid dealing with dishonest lenders.
Avoiding Second Mortgage Scams
There are a few particular scams that you should be aware of before getting a second mortgage. One of these scams is known as "flipping." Flipping is a tactic used against borrowers who are already facing foreclosures on their homes. A lender will offer to refinance the loan so the borrower can keep the home, only to tack on enormous fees that make the payments of the new loan impossible for most borrowers to pay. Flipping can reduce the equity that you have in your home and increase the amount of money that you owe. To avoid lenders who may practice flipping, watch out for offers that are too good to be true, particularly from lenders who don't have recognizable names.
Another scam is "packing." In this case, a lender adds unnecessary and costly services on to a mortgage. These additional costs may be identified as types of insurance, but they generally are not needed and don't even pay out as expected. Avoid this scam by making sure that you understand all the terms of your mortgage. Do not sign any documents with blank spaces and do not agree to pay for insurance unless you know precisely what it entails.
"Stripping" is a scam in which lenders intend for you to miss a payment on your loan. When you do, they immediately foreclose in order to sell your home for a profit. Prevent falling prey to stripping by looking over your loan documents carefully and refusing to agree to a loan that has blank spaces or misrepresents your income.
If You Are Already Facing Foreclosure
What you should do to deal with a foreclosure that is already in progress depends on the amount of equity that you currently have in your home. If you have a lot of equity built up in your home, your second mortgage lender may be more motivated to go through with foreclosing. In this case, the best course is generally to sell your home and pay off both your first and second mortgages with the proceeds of the sale. Another option is to refinance both loans, combining them into a single mortgage.
If you have little equity in your home, there may not be enough equity for the lender to pay off both loan balances, so it may be less motivated to foreclose. If this is the case, try approaching your mortgage lender to work out a forbearance payment plan that you can keep up with. If this fails, you can try making only payments on your first mortgage and hope that your second mortgage lender will not be sufficiently motivated to foreclose. This is certainly a risk, as the lender will be within its rights to foreclose when you default.
Protecting Yourself
As with any mortgage agreement you make or any option to save your home that you pursue, the best way to protect yourself from being foreclosed is to deal only with honest lenders. If you find yourself in a situation where you are in danger of defaulting on your mortgage, contact your lender as soon as possible to try to work out a solution other than the lender foreclosing. Dealing with an honest lender will increase the chance that you will be able to save your home and your credit.