How can a second mortgage on your house be able to foreclose when you are still current on your first mortgage?

If your second mortgage payments are not paid on time, the second Trust Deed lender can make the decision of foreclosing. But what happens to your first mortgage if you are still current on it?

First its important to understand what is a second mortgage trust deed.

Second mortgages are loans tied to a property that are second or subordinate to the original first loan and will receive pay off only after the original mortgage has been paid off.

It can be a standard fixed payment loan, or a line of credit that you can pull from. Home Equity Lines of Credit (“HELOC”) loans are an example of secondary mortgages if they are subordinate to the first. Being riskier to lenders due to the fact that secondary loans only get paid after the first, the interest rate on a second mortgage is usually higher than the first.

Second mortgages are commonly used to pay for large expenditures such as college tuition fees, home remodeling, or the purchase of a car; there are some cases in which homeowners use a second mortgage to consolidate other debts at a lower rate.

What happens if you stop paying your second mortgage?

After giving you a certain amount of time to catch up on your payments, the second mortgage lender will review the value of your home to see how much equity is in your house.

Since the first mortgage is the original one, it tops the list of priorities and has to be paid first entirely with the money from the foreclosure. Whatever is left pays the second. If there is enough equity to cover the first mortgage and the second mortgage, the second mortgage lender will initiate the foreclosure process. The second lender also has to consider the cost and fees associated with foreclosure.

If there is not enough equity for a foreclosure to cover at least most of the second trust deed loan, the lender will consider other options. One option is to keep the loan in place and accrue the payments with late fees and hope that eventually the property’s value will increase to cover the second mortgage. Another option is the second mortgage lender will sue the homeowner, and place a writ on their income.

The best way to avoid second mortgage foreclosure

The first tip will be not to fall behind with your payments; the second mortgage lenders have higher rates so your attention should be equally distributed to both loans. If you have already fallen behind, the bank representative may give you a chance and discuss a forbearance plan to resolve the missed payment and get back on track. They want to avoid costly legal routes including suing or foreclosure.

Many lenders will do a loan modification program that can help you make your payments more affordable. All these procedures must be done in time because if you receive the 30, 60 or 90-day notice your chances of getting more credit or reprogramming options are lost.

Is it better to take a private third mortgage or refinance your current loan with cash?

Usually, property owners are confused regarding which way is best to use money from the equity of their home if they already have a second mortgage.  Either they can go for private third mortgage, or they can refinance their loan with cash. This article attempts to explore these two aspects so as to help in rational decision making.

Discussing third mortgage loans

A third mortgage loan can be used by the borrowers to add something of value to their home such as swimming pool, speciality kitchen, gym, etc. With regards to debt consolidation, the third mortgage enables borrowers to pay off the short-term debts and still enjoy lower interest rates. Also, it is very easy to obtain third mortgage loans within a period of 2-5 business days. From the viewpoint of lenders and investors, third mortgage loans are an efficient stream to increase their portfolio and spreading the risks across a number of mortgages. 

However, after taking two mortgage loans, it is very difficult to find lenders who would provide third mortgage loans. Also, the interest rates for third mortgage loans are higher than the first and second loans. The lender also charges a lender fee along with the interest rates and this increases the cost of the borrowers. It also includes broker fees, legal fees and other associated costs which lead to an expansion of the loan amount.

Cash refinancing

Here, an existing mortgage loan is refinanced such that the new loan is a higher amount than the previous loan and the borrowers’ pockets the difference between the two loans as cash. The interest rates will be a bit higher, and the cash out is limited to 80-90 percent of the equity of the property. The total amount of cash that can be withdrawn from this process depends on the lender, the value of the property, the program as a whole along with some other relevant factors. After the refinancing is complete, the new loan will comprise of the original balance before the refinance as well as the desired case out money.

Differences between the two

While third mortgage loan is an added burden to the first loan, the cash out refinances simply a replacement of the first mortgage loan. Also, the interest rates are often lower for cash-out refinance that the third mortgage loan. Closing costs are higher  for refinancing of loans while it is not so high for the third mortgage loans. These closing costs can vary from hundreds to a few thousands of dollars and can thus be a liability for refinancing loans. Cash out loans are much riskier than other loans because they take first position, giving them power to foreclose. The freedom to use the cash, in case of cash out refinance, lies at the disposal of the lenders and as many such restrictions are put on the borrowers as to the usage of the loans. However, such issues do no rise for the latter.

So if the current loan is at a lower interest rate, it does not make sense to refinance the loan at a higher interest rate. Also if someone is already in the middle of a long-term mortgage, then he is advised not to go for cash out refinance.

The Benefits of Investing in Land

Most investors choose stocks and rental income to get a return on their money. But what about raw land? What are the benefits of it compared to the other two?

Less Competition

Most investors do not like to purchase land because there is no yield, and to get to have yield you must develop the land in some way, which requires not only more money but time and work. Thus, there is less competition, which is easier for you to acquire land at a more favorable price.

Easier Entitlement Changes

This depends on where the land is located, but it is generally easier to change the zoning of raw land then its is for land with a structure and tenants in place. Though the process may take time, if it changes to a more valuable zoning, your land value goes up instantly.

Creative Control

Unlike investing in stocks, you have more control on what you want the direction of your land investment to go. You have control on what kind of structure is best suited for the area and the best way to design it.  You can also hold off on building or build right away depending on the market conditions. 

Peace of mind

Another great thing about investing in land is you do not have to maintain it. Nothing gets stolen or broken. Land does not wear out. There will be no additional expenses in maintenance costs.

You Don’t Have to Be There

With empty lots, you do not even have to be physically present to purchase it. You do not have to travel all the way to inspect. You can just look up the empty land on google maps and the details within the land’s local municipality and title company. This allows you to purchase in areas outside of where you are located, giving you a bigger market with none of the headache of owning out of town rental income.  

Lenders will loan on it 

As long as you have significant equity or down payment in the land, you can have a loan on it with a relatively low interest rate. This is because lenders understand that most land does not lose value of what it is appraised at, and to them its a strong secure investment as well.

How Restoring Glass-Steagall Act Will Affect Online Lending

Online lending is the new, more efficient way of lending and banking. It has fewer restrictions, it’s more practical, it looks attractive, and it’s far easier than old-fashioned lending. Online lending is affected by laws, though.

Here’s the latest news from the world of finance: the Glass-Steagall Act is about to be put back into action, with the back of influential personalities support it.

The Glass-Steagall Act

The Glass-Steagall Act was created to fix the Great Depression because the Great Depression was caused by people who were borrowing too much money. The Glass-Steagall Act limited the amount of money that can be lent, and the people who were allowed to borrow money. The law fixed the Great Depression. The Glass-Steagall Act was repealed in 1990.

The financial crisis of 2008 caused certain people to say that the Glass-Steagall act should be brought back, though. It will prevent the financial crisis of 2008 from repeating and will help the rich people of the United States to stay rich.

What Happened

Based on the result of the Glass-Steagall act on US economy during the 1980’s, though, this law will potentially hurt online lenders. During the years that the Glass-Steagall Act was in effect, banks were unable to keep up with banks in other countries because banks in other countries did not have this restriction. Some local banks, in their desperation to keep up with foreign competitors, ventured into unknown systems. Fewer investors trusted US-based banks because of this. Other banks lost business and shut down altogether. The Glass-Steagall Act was repealed in 1990 because of this economic dilemma.

What to Expect

For online lenders today, there are two things to expect when the Glass-Steagall Act goes into effect again: fewer investors, and fewer borrowers. As you change your work algorithms to follow the new law, the investors will be less interested in investing through your business. As fewer borrowers are allowed by the law to borrow, and as the ones who are allowed find out there’s less money to be borrowed, your borrowers will go away and find other ways. Restoring the Glass-Steagall Act has a high possibility of hugely affecting online lending.

The Bright Side

Some business analysts argue, though, that the problems we were facing during the Great Depression and the 1980s were different from the problems we are facing now. There is a small number of people who believe that the Glass-Steagall Act will be not as bad for online lenders as we think. For one, it might start a whole new avenue of funding and creative lending which has never been done before. Also, it will help reduce long term volatility in the debt markets. 

Conclusion

The only words of warning to keep in mind are: Be prepared. You have two options. Choose a different field of work, or stay where you are. If you are staying, add new features to your online lending business to bear with the shock that the Glass-Steagall act can possibly bring. On the other hand, you can choose to maintain the same routines and observe how things change. The only thing that we have is time. We can wait and observe how the Glass-Steagall Act will affect our work once it is restored.