Second Mortgage, What Happens If I Don't Pay?

Every day I speak to people that thought the best way to pay off their credit card debt and car loans was to take out a second mortgage on their home. In no time the credit cards are maxed out again and they've bought another new car leaving payments that they can't afford. Invariably they ask "What Happens If I Don't Pay My Second Mortgage Payments?"

Here is what happens if you decide you can't (or won't) make the payment on your 2nd mortgage:

1. The second mortgage lender will report the missed payments to the credit reporting agencies. This will negatively impact your credit score and make obtaining new credit more difficult and may make refinancing your mortgages impossible. Also, many creditors have clauses in their credit agreements that state that your interest rate and payments may increase substantially if your credit score is lowered.
2. Fees will begin to accure against the loan. The amount that you owe will grow substantially and quickly.
3. The second mortgage lender may file for foreclosure. In this event your home will be sold to the highest bidder. The proceeds of the sale will be used to pay of the first mortgage and then the second mortgage. The second mortgage may not get the entire amount of the outstanding debt back, but they will likely figure that something is better than nothing.
4. If the lender feels that they won't get their investment back by foreclosing on the home it may just hold the lien against the property. This will make it impossible for you to refinance or sell the home without paying the second mortgage off first.

That, in a nutshell is what will happen if you don't pay your second mortgage.

Are There Prepayment Penalties on Second Mortgages?

2nd mortgages are avaliable in a wide variety of forms. Home Equity Loans and Home Equity Lines of Credit (HELOCs) are considered second mortgages. A 2nd mortgage is any loan that is secured by real property that is not in first lein position.

When you take out a second mortgage of any type you should investigate whether there are prepayment penalties on the second mortgage. Usually, if you pay off the loan before a set period of time, regardless of whether you just want to eliminate debt, sell the home, or refinance at a lower interest rate, there is some sort of penalty which may range from a few dollars into the thousands. Before agreeing to take the home equity loan or line your should be sure to understand if there is a prepayment penalty and if so, how is it calculated.

Many lenders have begun disguising the prepayment penalty on their second mortgages, calling it a "bailout fee" or using similar terminology. Basically, they say that they are not penalizing you for closing the loan early, they are simply charging you for the lenders expenses associated with the loan. Either way, if you have to pay extra to close your second mortgage early it is a prepayment penalty.