When financing certain assets, like purchasing a home, you generally take out a mortgage. Later along the line, you may find yourself taking out an additional, or second mortgage, to help finance different assets or payments. If your financial situation worsens, you may find yourself filing for bankruptcy. By doing so, you may be able to reduce the amount of money owed on your second mortgage or even clear its remaining balance altogether.
FIRST MORTGAGE VS. SECOND MORTGAGE
Your primary mortgage is referred to as your first mortgage. When purchasing a home, you receive a mortgage through a lending company. First mortgages include any loans taken out to finance additional properties you own. If you default on your mortgage payments, the lender has the right to foreclose on your property and sell it in an auction to make up for the outstanding debts. Your first mortgage will always take priority over all other loans you take out.
In contrast, a second mortgage can used to finance property and assets, such as a pool, yard work or even a lavish vacation. In order to apply for a second mortgage, you must have already paid a significant amount of your initial mortgage, also known as your home equity. Home equity indicates how much of your mortgage you have already paid off. For example, say your home’s current value is $500,000. Initially, you made a down payment of $10,000. At the time, your home equity was only $10,000. Over time, have paid $200,000 of your $490,000 mortgage. Your home equity has now become $210,000. In other words, you now own $210,000 worth of your property, and the remainder serves as collateral for the lending company. Collateral provides the lender with a sense of security in case you default on your payments. If you fall behind on payments, the lender has the right to take legal action against you, including refinancing the property or asset the loan was used for. For example, if you took out a second mortgage to complete the renovation of your kitchen but have fallen behind on your payments, you may risk home foreclosure. When taking out a second mortgage, your home serves as collateral for the lending company.
The greater the initial down payment you make upon purchase, the greater your home equity. Over time, you can continue building up your equity. The most obvious way is by making mortgage payments on time. Another easy way to get your home equity to increase involves doing nothing on your part. If the real estate market is booming, house prices will increase, which will increase the value of your home. This will automatically increase your home equity. Alternatively, you can complete minor or major renovations update your home throughout the years to keep its value up.
When you take out a second mortgage, you then become responsible to pay both mortgages. Although the second mortgage may be in regard to a different asset, it uses the primary mortgage as collateral. That is why it is crucial for you to have a sufficient amount of your first mortgage paid off when taking on a second one.
OTHER TYPES OF SECOND MORTGAGES
-
Lump Sum
A lump sum is an amount of money that serves as a one-time loan. You are not required to use this loan for one specific asset. For example, you can take out a lump sum to help complete different monthly payments. Over time, you will make payments to repay the borrowed amount plus interest.
-
Line of Credit
Using a line of credit to borrow money is the use of taking funds out of an existing account. For example, you will ask to borrow from a lender, and they will setup a line of credit with a maximum limit of $25,000. Over time, you can withdraw money as needed but cannot extend past the limit line. You will continue making payments on the money borrowed.
PROS OF TAKING OUT A SECOND MORTGAGE
Second mortgages can be advantageous for you in several ways. This includes, but is not limited to the following:
-
Larger Loan Amounts:
When taking out a second mortgage, you are giving yourself access to a larger amount of money. Since your home is serving as collateral, this allows for the loan to be much larger. -
Lower Interest Rates:
Lenders typically view second mortgages as less risk because the debtor’s home is serving as collateral rather than an unsecured loan. This often causes them to charge lower interest rates. Lower interest rates will allow you to pay less as the years go on,
CONS OF TAKING OUT A SECOND MORTGAGE
While there are some bonuses to taking out a second mortgage, there are also some drawbacks to be aware of. This includes, but is not limited, to the following:
-
Potential Home Foreclosure:
Since your second mortgage is being financed using your home as collateral, you do face the risk of home foreclosure. If you fail to make payments, the lender may seize your home and enter it into a foreclosure to eliminate your debts. Because of the severity attached to this, it is important to not just take out a second mortgage for ordinary purchases. Second mortgages should be used in situations like projects to repair or improve your home. -
Additional Expenses:
Whenever you take out a mortgage, you are faced with additional costs you otherwise would not have paid. One main example is interest. Interest rates are used to protect lenders. Interest rates can increase as time passes, which can be a serious way of increasing the amount you actually owe.
FILING CHAPTER 7 BANKRUPTCY
Once you have come to the decision to file for bankruptcy, you will meet with your bankruptcy attorney to begin your bankruptcy filing. Together, you will complete all the necessary paperwork in order for the Court to grant you relief. Once your case has been filed with the Court, you will gain protection under the Automatic Stay. When filing Chapter 7, you will not able to remove the lien completely. Instead you may be able to have the mortgage refinanced at a lower rate. You will continue to make payments on the loan through the finances earned from your asset liquidation.
FILING CHAPTER 13 BANKRUPTCY
If you decide to file a Chapter 13 bankruptcy instead of a Chapter 7, you may end up stripping your second mortgage entirely. Once your case has been filed, you will begin completing your Chapter 13 Repayment Plan.
When completing your paperwork, you must list what you believe to be the fair market value of your property. This will show the Court that the home is worth more than the remaining balance on the first mortgage. If successful in doing so, the Court will allow for a Motion to Value. Upon completion of the Chapter 13 bankruptcy, the second mortgage will be “stripped,” and the lender will no longer have a stake in your residence. Filing for a Chapter 13 bankruptcy will protect you from losing your assets, in addition to lowering your total amount of debts owed.
If you wish, you may also attempt to have your mortgage adjusted during the bankruptcy filing. If the lender agrees, then your Chapter 13 Repayment Plan will be modified to reflect these changes. You may then continue with making payments as scheduled in your Chapter 13 Repayment Plan. Upon completion, you will still receive your discharge and have the rest of your debts eliminated.
“STRIPPING” A MORTGAGE
In a Chapter 13 filing, your unsecured debts, such as credit cards or utility bills, can potentially be eliminated. Unsecured debts are those where the creditor does not hold any collateral. For example, if you have defaulted on your medical bills, the hospital is not going to be able to take back the medical care you received. To determine how much of your unsecured debts you will pay, you must look at the amount of disposable income you earn. Disposable income is the amount of income leftover after any monthly expenses have been deducted. When repaying creditors, your secured and priority creditors receive priority. Any remaining disposable income is used to pay off general unsecured debts. Your Chapter 13 Repayment Plan will distribute this remaining amount amongst your unsecured debts to establish how much you must pay for each. Upon completion of your plan, the rest of the balance will be wiped, and you will no longer be responsible for these debts.
Stripped mortgages are dealt with in the same manner. This will be listed out in your Chapter 13 Repayment Plan. For example, say that your plan establishes that you will pay 10% of each unsecured claim. If you are making payments monthly, each month you will make your payment directly to each creditor, and the rest of the 90% balance is wiped out. In regard to your stripped mortgage, this works the same. You are responsible for 10% of the total balance, and the rest will be eliminated upon receiving a discharge. Second mortgages can only stripped if the amount owed on the primary loan exceeds the home’s current value. If the value is greater, than you may continue with having your second and additional junior mortgages, stripped.
HOW CAN WE HELP?
Filing for bankruptcy can provide you with several beneficial opportunities. This includes being able to eliminate a sufficient amount of a second mortgage. By hiring Sacramento Bankruptcy Lawyer, attorney Pauldeep Bains will walk you through every step of the bankruptcy process and thoroughly explain which ways you will benefit, including stripping any secondary mortgages. Contact us today to set up your FREE consultation and begin working towards a debt-free future.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.
