Nearly 40 percent of homeowners with second mortgages are underwater, according to a story in the Wall Street Journal. That's more than twice the rate of homeowners without second mortgage, data from CoreLogic Inc. shows.
Refinancing can be impossible
For many homeowners looking to refinance, having a home equity loan or home equity line of credit may be a deal breaker. It is also difficult to hook up a mortgage loan modification or short sale with a second mortgage in the picture. With a short sale, all lenders involved must agree to the deal, and in many cases the holder of the second mortgage ends up taking a loss.
What to do if underwater on a mortgage
So what should you do if you're underwater and have a second mortgage?
- Keep making payments on your loans if you can. Once you pass the grace period for making a payment, you'll be hit with a late fee. If you fall three or four months behind on mortgage payments the possibility of a foreclosure filing increases. In most cases you're better off making a partial payment to hold off the threat of foreclosure. JPMorgan Chase analysts found that about 42 percent of underwater borrowers are current on their mortgage payments, according to a HousingWire article.
- Try to renegotiate the interest rate on your home equity line of credit or home equity loan. Many home equity loan products have adjustable rate mortgages, but your lender may be willing to offer a fixed rate to help you get back on track with payments.
- Put your house on the market. Even if you don't think it will sell, it's worth taking a chance that it might. Get your home in tiptop shape so that it will attract as many buyers as possible. Try to get your lenders to agree to a short sale. Lining up a buyer willing to do a short sale could convince your lenders to sign off on a deal.
- Take in a boarder who can help with monthly mortgage loan payments. You may have a family member, friend or co-worker who needs a place to stay for a while. You can help each other out and hold onto your house longer.
- Get a second job or start a home-based business that can bring in more income. The extra cash can go toward paying down the second mortgage, credit cards or other debt that is putting a financial squeeze on you.
- Don't walk away from your home loan. Strategic defaults have become more common as some homeowners have found that they can't--or won't--continue to make mortgage payments while being underwater.
Waiting for the market to improve
The bottom line is that the housing market is still showing a lot of weakness, so you may have to tough it out quite some time before your property value begins to rise. If you have a healthy income, your best bet is to honor all mortgage obligations and avoid harming your credit rating. If you need advice about handling mortgage loan problems, make an appointment with a housing counselor approved by the Department of Housing and Urban Development (HUD).