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2nd Mortgage Possibility

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2nd Mortgage Possibility

Well, I'll start off in explaining the events that led up to where I find myself in the current state of financial affairs.

 

I bought a house on the outskirts of a major Southern city in 2011 at the near bottom of the 2008 financial crisis, single family home with FHA rate of 3.49% and house purchase price was around $130k, with $5k down. Currently, the house is worth close to $180k, so a nice revitalization in the neighborhood all around, I love it and people around me. I made improvements that have likely added another $20k (new garage door, insulation, appliances, covered gutters/wildlife protection, etc.).

 

In early 2014, I got invovled in a relationship and made several snap decisions to constantly help her out with some financial issues by depleting virtually all of my savings and obtaining a personal installment loan of around $20k and currently pay close to $700/month. (And before you ask, she's still struggling with her financial issues, it's over now) That's not to mention all of the other strain that my remaining credit card accounts have on my finances. Not only that, I encountered some unforeseen medical issues in 2015 that are thankfully almost over, but since I thought I was immortal being in my early 30s, I figured a high-deductible health care plan through my employer would be the smart decision this year; was I ever wrong about that.

 

The cash flow problem really started last Fall where I fell behind on some payments including making 30 day late payments on my mortgage from the period of July, August and September. I've never been late on any account since then and my credit report shows that I paid on-time for all accounts since the payments were less than 30 days overdue at the time, with the exception of my mortgage. I regret not giving the mortgage priority with regard to paying on-time, since that's the only negative account listed on my credit report, but shows "pays as agreed" status with on-time payments for the past nine or so months through June when the date of last activity was reported.

 

I really need to get rid of the $20k installment loan to significantly improve my cash flow and was wondering about a couple of options.

First, I was thinking a cash out refi to wipe out the installment, but I doubt anyone would do that considering I have less than $5k in reserve for a down payment and a 582 credit score.

The other option is a second mortgage or home equity line of credit, though I haven't done a lot of research, there seem to be restrictions on what you can do with equity collected from a second mortgage against an existing FHA loan. I just want to use the proceeds from equity to pay off all of my open accounts which total around $35k.

 

The questions I have:

1. Will my credit score significantly improve after my Mortgage Servicer reports 12 consecutive months of on-time monthly payments towards the end of the year, considering it will be 12 months this October and will the account be removed from the "negative" category? (Their credit reporting seems to be two months behind)

2. Really stupid question that I think I know the answer to but here goes: Do you have any knowledge of an installment loan being closed out as a lein against the equity of the equity of the account holder's primary residence? (I've seen wild things in this lifetime so far, so I thought I should just ask)

3. Any other options that might accelerate my predictment, other than obviously walking away from the home I dearly love, going the renter's route for a couple of years and taking the cash proceeds to paying off my exhorbant debt load?

Message 1 of 5
4 REPLIES 4
Moderator Emerita

Re: 2nd Mortgage Possibility


@southerndweller wrote:

 

I bought a house on the outskirts of a major Southern city in 2011 at the near bottom of the 2008 financial crisis, single family home with FHA rate of 3.49% and house purchase price was around $130k, with $5k down. Currently, the house is worth close to $180k, so a nice revitalization in the neighborhood all around, I love it and people around me. I made improvements that have likely added another $20k (new garage door, insulation, appliances, covered gutters/wildlife protection, etc.).

 

....

  

I really need to get rid of the $20k installment loan to significantly improve my cash flow and was wondering about a couple of options.

First, I was thinking a cash out refi to wipe out the installment, but I doubt anyone would do that considering I have less than $5k in reserve for a down payment and a 582 credit score.

The other option is a second mortgage or home equity line of credit, though I haven't done a lot of research, there seem to be restrictions on what you can do with equity collected from a second mortgage against an existing FHA loan. I just want to use the proceeds from equity to pay off all of my open accounts which total around $35k.

 

The questions I have:

1. Will my credit score significantly improve after my Mortgage Servicer reports 12 consecutive months of on-time monthly payments towards the end of the year, considering it will be 12 months this October and will the account be removed from the "negative" category? (Their credit reporting seems to be two months behind)

 

2. Really stupid question that I think I know the answer to but here goes: Do you have any knowledge of an installment loan being closed out as a lein against the equity of the equity of the account holder's primary residence? (I've seen wild things in this lifetime so far, so I thought I should just ask)

 

3. Any other options that might accelerate my predictment, other than obviously walking away from the home I dearly love, going the renter's route for a couple of years and taking the cash proceeds to paying off my exhorbant debt load?


You are in better shape than you might think.

 

1) Before you do anything, call a couple of good experienced Realtors in your area and have them provide a market analysis for you. This is so you are totally aware of your current, actual home's value.  If you have done that already, then great.

 

2) Once you have the value, you can then decide if a second mortgage to pay off the debt is good for you. There are limits as to how high a lender will go as far as LTV is concerned. For example, if the lender does actually appraise your home for $180,000 and the max CLTV is 90% then you would end up with approx $30k.  This is less than you need, but should help you greatly with your existing debt. 

 

3) The only way the installment loan could end up as a lien against your home is if you stop paying it and the lender sues you, win's, gets a judgment and goes for the lien. You can stop the lien by continuing to pay the installment loan.

 

4) Don't walk away. There is never a reason to walk away when you have positive equity in your home. Those people that walked away during the mortgage meltdown had negative equity (typically).   If you are truly overwhelmed then sell the home and pay off your debt.

 

However, there are other solutions:

  • Get a roommate so you have extra funds coming in - at least explore this opportunity. You might only need one for a year or so to get back on your feet
  • And/or Get a second job temporarily until you get a handle on your debt
  • And/or Sell stuff around the house (extra things) to get some cash to put into savings so you don't get behind or to negotiate with a lump sum for the installment loan payoff
  • Or, if it is worth it, rent out your home for a year or two until you get back on your feet.

Go to daveramsey.com to look up budgeting and get help gettng rid of debt. Check out You Need A Budget too (not as radical as Dave Ramsey).

 

What is the installment loan?  A vehicle?  If so, sell it. Find a vehicle for cash while you are going through this tough time.

Message 2 of 5
New Visitor

Re: 2nd Mortgage Possibility

Okay so not as dire as I thought...I know five years seems like a long time and it is relatively speaking to pay off all this extraneous debt. But I can deal with it and regard the selling option as the nuclear option for certain. I'll just wait until November to start exploring the possibility of perhaps obtaining the 2nd mortgage if I can.

 

All in all, again, not as desparate as initially thought. Thanks much for the advice startingover10

Message 3 of 5
Moderator Emerita

Re: 2nd Mortgage Possibility


@southerndweller wrote:

Okay so not as dire as I thought...I know five years seems like a long time and it is relatively speaking to pay off all this extraneous debt. But I can deal with it and regard the selling option as the nuclear option for certain. I'll just wait until November to start exploring the possibility of perhaps obtaining the 2nd mortgage if I can.

 

All in all, again, not as desparate as initially thought. Thanks much for the advice startingover10


Good luck southerndweller. Even if you do end up selling, think of it as temporary. I hope everything works out for you in your journey to pay off your debt.

Message 4 of 5
Frequent Contributor

Re: 2nd Mortgage Possibility

Heloc is home equity and normally you can pull up to 80% of value. EX: If you have 100K equality you can withdraw 80K.

And yes once you open HELOC account the bank will put a lean on the house even if you never use it till it expires.

Lean on the house is a good thing as in case somebody sues you they can't use that equality !!

Lots of cards and counting !!
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