Managing Your First and Second Mortgage Debt
During the Real Estate Boom of the late 1990s and early 2000s, banks were quick to give out loans up to and above the value of the homes being mortgaged. In theory, a property should not have a loan against it in excess of 100% of its value. Most first mortgages, even during the most rowdy markets, would not exceed 80% of the value of the property. To cover the balance, and avoid having to gather up a substantial down payment of 20% of the cost of a house, many buyers took out a second mortgage to cover the balance.
Legally speaking, the first mortgage debt has “priority” over the second. Practically, this means that the first mortgage lender could foreclosure and take the property free and clear of the second mortgage if there was a default. The borrower would still be personally liable to pay off the balance of the second mortgage even though they lost the house to foreclosure. But, the second mortgage lender could not foreclose on the property without paying off the first mortgage. And interesting balancing act developed in the credit market.
If you’re already burdened with a first and second mortgage debt on your home, here are some tips for managing the debt, with the hope of paying things off early or, at least, lowering your payment:
Consider Mortgage Debt Consolidation
Refinance and consolidation was not an option a few years ago following the collapse of the real estate bubble. Housing values were depressed. But the market has recovered significantly. Banks want to lend again to reliable and responsible borrowers. If you’ve been loyally making your mortgage payment, the principal may be low enough that you can turn your two mortgages into one. This will lower your short term and long term interest payments (thus lowering your total monthly payment). It may reset the 30-year clock on your mortgage, but you can always pay more to pay it down faster. Plus, with a new mortgage you’ll have a new interest rate. Interest rates now are at all time lows.
Pay it Down Faster
If you can afford a few extra hundred dollars a month, work hard to pay off that second mortgage debt faster. Instead of spreading out the payments over 25 more years, with a little investment you can pay it off in 2 or 3 years.
HAMP and HARP – Federal Government Programs
After the federal government “bailed out” the banks, it created the Home Affordable Modification Program and Home Affordable Refinance Program. These are financial incentives to banks to assist borrowers whose mortgage are underwater… meaning they owe more than the house is now worth. Conditions for participation are strict, and the application process can be onerous. But hundreds of thousands of borrowers have taken advantage and had their payments reduced substantially.
Most Important… Don’t Default
If you can’t make a mortgage debt payment, on either your first or second mortgage, contact the lender first and see if you can work out payment arrangements. Missed payments will harm your credit score and put you in a cycle of late payments and extra interest that may lead to foreclosure even if you get back on track. Get everything in writing. Keeping your home is worth the extra effort.