Second Mortgage

Your Best Second Mortgage may prove to be a mistake for you in future.

First mistake that most people make, while shopping for the best second mortgage, is to take steps without thinking and they decide to consolidate existing debts in a new second mortgage without considering the implications for your ability to terminate mortgage insurance, refinance your first mortgage, move to another city, etc.

Adding a second mortgage to the first may hinder your chance to refinance the first when a profitable and better opportunity to do so appears. When a first mortgage is paid off, an existing second mortgage automatically becomes a first mortgage.

This makes it impossible to replace the old first mortgage with a new one unless the second mortgage lender provides the refinancing lender with a written statement indicating a willingness to subordinate the second mortgage to a new first mortgage. Many second mortgage lenders will to do this, charging fees that range from nominal to exorbitant, but some won’t do it at all.

Adding a second mortgage will also extend the period during which you must pay for mortgage insurance on your first mortgage, perhaps indefinitely. While you do not fall under the new rules that require lenders to cancel mortgage insurance when certain conditions are met, lenders will usually cancel a policy voluntarily if the balance has been paid down appreciably over several years and is less than 75-80% of property value. But they may not cancel it if you have added a second mortgage.

At the most important stage of your life, your best second mortgage may turn into your bad mortgage debt. If the second mortgage results in your total mortgage debt exceeding the value of the property, you may lose your mobility.

Suppose you are offered a better job in another city that would require that you relocate. If you owe $120,000 on a $100,000 house, selling the house means finding $20,000 in cash to pay off both mortgages. If you can’t find the cash, the only way to relocate is to default, which would prevent you from buying a house in your new location.

You best bet can be to shift the second mortgage to 10 or 15 years, whichever is comfortable and which provides a total payment close to the one you have now.