With home prices soaring, many people followed the advice of lenders to consolidate their debt with a “deductible” second mortgage. Fortunately, low interest rates and the ability to pay interest only for part or all of the loan has made these debts manageable. All that may soon change. A recent article in Reuters warns that over the next 4 years over 200 Billion Dollars in home equity loans will reach the 10 year mark when borrowers will have to start making principal payments as well as interest payments. http://www.reuters.com/article/2013/11/26/us-usa-mortages-homeequity-insight-idUSB Combine this with the likelihood of rising interest rates, and you have a disaster waiting to happen.
If you have a home equity loan, the first thing you need to do is check the terms of the loan to see if it is an interest only loan, or if principal has to be paid at year ten. Also check to see if the loan has a variable interest rate, most Home Equity Loans I have seen have fluctuating rates. Once you know what you are dealing with you have options.
1) If your home is worth less than the first mortgage you may be able to strip the second mortgage by filing a Chapter 13 Bankruptcy.
Even if you are not currently facing a crisis keep in mind that home prices are rising and as you continue to pay on the first mortgage, your equity increases. If you wait too long that option may no longer be available.
2) If you have equity in your home and you are looking at an increased payment you might consider rolling the equity line into your first mortgage while rates are low.
3) You can start paying on the principal now to keep the payments lower when interest rates rise.
4) Consider a Chapter 7 bankruptcy if you qualify, to rid yourself of all unsecured debt so you have money to pay the equity line. As an added bonus you may be able to negotiate a lower lump sum pay off of the second mortgage if you file Chapter 7 since second mortgage companies rarely foreclose on the home, since doing so will generally not result in any payment to them.
No matter what, its good to be proactive. You don’t want to face a balloon payment on your second mortgage that you cant make.
