2nd mortgage, How does it work?

[thelittlemermaid]

I was talking to a friend tonight and she was asking me how a 2nd mortgage worked. Why she asked me, I have no idea cause DH and I don't have one.

I guess they are in some money hardships right now. Last year they refianced their mortgage and paid off their CC's. Four months ago her husband had to have emergancy surgery and now they have medical bills in the amount of $40,000. Since then his doctor has kept him off work and cause of that is not getting a paycheck. In the mean time, they have been living off 1 CC to pay for food and utilites and now they are in more like $45,000.

She is really upset cause they are almost at the end of their credit limit. Her family can't help them out cause they are struggling {her father got layed off} and his family I guess won't help cause they are ............., {pick a not so nice word and insert}. His doctor is finally going to be letting him go back to work in 2 weeks.

They have been talking about getting a 2nd mortgage to pay for the medical bills and the CC that they have been using and be done and over with. But I have no idea what to tell her. I don't know how a 2nd mortgage works or even they can get one.
I know all to well what she feels like, with DD having medical bills all the time, they can be a pain in the butt. Especially when the doctor, hospital, and specialest all want their money and want it now.

Can anyone help me out and give her any advice on how it works?

Thanks so much!!!

 

[capthooksmom]

I hope I'm giving you accurate info. If not, hopefully someone will correct me or fill in the gaps.

2nd mortgages, aka home equity loans or home equity lines of credit allow you to borrow a certain percentage of the equity of your home either as a fixed loan or as a line of credit (similar to a credit card) The advantage to this is that the payments are usually lower than all other CC and loans combined and the interest you pay is tax deductible. The drawbacks are that CC's and some other loans are unsecured debt. If they can't make those payments they will get hounded by creditors and their credit score will drop, but they will not lose their home. If they secure that debt with their home and are not able to pay, they can/will lose their home. I don't know if any circumstances where you can default on an equity loan and keep your home. Maybe someone else will. I also don't know if they can get one with the husband out of work. I would advise your friend to be very careful about converting unsecured debt to secured debt. Good luck!

 

[Luv2Roam]

capthooksmom did a very good job.
We have in the past bought a new car on a home equity loan just so the interest paid would be tax deductable.
But we owded no where near the value of our home.
That is something to consider. Worse case, if they sold their home, after both mortgages were paid, would they be able to buy another home and still feel somewhat secure?
I hope everything works out for them.
Have they gone to a credit advisor? Those services are often free. That is their best bet.

 

[crisi]

Generally, you will only be able to borrow to the amount of equity in your home.

They may want to consider refinancing, instead of a second mortgage. With a refi, they will pay off the old loan and take out a new larger loan for the house. They can use any appreciation (which they can also use if they get a 2nd mortgage), and will only have one bill.

In some states your home is a protected asset in bankruptcy procedings - which can protect it if you get in horribly over your head, even with a second mortgage. But it might not be a bad idea for them to talk to someone in a legal aid (the hosiptal social worker can give a referral) before they risk the house to pay bills. In fact, its probably not a bad idea to talk to the hospital about the medical bills, medical bills are often problematic, and they will have dealt with this issue many times before and have some suggestions.

 

[ducklite]

Most of the info posted prior is accurate, a few things to clear up.

A 2nd mortgage is NOT a Home Equity Line. They are different things. A second mortgage is a set amount, you borrow it once and pay it back over time, like a regular mortgage or car loan. A HELOC is bascially revolving credit. you can keep borrowin, as much or as little as needed, and only pay interest on what you use.

They might have problems gettting financing right now, unless they get it at very unfavorable terms. Banks want to know you can pay it back, and with him out of work, that's questionable.

Actually having a HELOC open that you can draw on in times like this is a great thing as long as you can be disciplined to not use it except in an emergency.

Anne

 

[Muushka]

ducklite (Anne) is right. I just wanted to add that I think that you get a better interest rate with a HELOC than with a conventional 2nd mortgage. The rate is based on the prime rate, which is very low (now). The other difference is that typically, the HELOC is not a fixed rate whereas the 2nd morgage is.

That being said, as capthooksmom said,putting your home up as collateral is a dicey situation. You can lose it.

 

[MrsPete]

I'm fortunate never to have had large medical bills myself; however, I thought it was possible to "make payments" on them without interest. I was under the impression that as long as you pay something towards the bill every month, the hospital cannot report you to the credit bureau people. If so, this would be vastly better than a second mortgage, which would cost a fortune in the long run. Again, I'm not sure this is true.

If they get a 2nd mortgage and their streak of bad luck continues (and hopefully it won't), then they'd risk losing their house. Right now the medical bills are unsecured debt -- if they aren't paid, the friend can be hounded by creditors, but she can't be put in jail or put out on the streets. If she exchanges that for secured debt (mortgage), then she can literally lose her home.

Has she looked into the possibility of going to a food pantry or some type of church-based help group? Those places are there for people who are in temporary emergencies, which is exactly what you're describing. They could help her prevent going further into credit card debt.

 

[capthooksmom]

ducklite, thanks for clearing that up. We had a line of credit and I was looking at it as they loaned us a set amount, but we could use as little or as much of it as we needed. But you are right, they are different.

mrspete, I think there is something to what you said about medical bills and the credit bureau. I worked billing/collections for a hospital and lab years ago and thought someone told me that medical bills, if reported to the credit bureau, were not looked at as harshly by potential creditors and that's why it was hard to collect $$ from some private pay patients. Hopefully someone who knows will read this and post.

 

[sphere99]

I have had quite high medical bills in the past and almost all hospitals are more then willing to work with you. When I was younger I had a $25,000 bill and my mother who was a single mother asked if they would accept payments (after explaining her situation) and they accepted $25 per month no interest! Since then, I have had to do this about 3 times (for less then $6,000 each time) and they have always accepted my payments and then you do not have interest!

 

[thelittlemermaid]

Thanks for all the replys!

I guess in the long run, is it possiable for them to get a 2nd mortgage even though they just refianced last year? According to her they refianced around June. So they have no if very little equity in their house.

Whatever they do is up to them. I just want to be able to give her correct info about a 2nd mortgage. She's the type of person that would rather talk to someone she can trust before going to a bank or some other place to talk to someone she doesn't know.

They just want to hurry up and get the medical bills taken care of. It seems everytime the doctor bill and specialest bill isn't paid when it's due, for example after the insurance paid their part they get their bill say for $5,000 and it says it's due on Oct 9, if they don't pay that $5,000 on that date, they are being charged late fees {they are charging them $100 everytime the bill isn't paid in full on the due date. She figured it out to be $20 for every $1,000} Talk about the doctors and such being greedy!!! This has been happening for the past 4 months. Even though they might pay something on the medical bills, it really isn't getting them anywhere cause of the late fees.

I really don't know what to tell her. I wish I could help her, but with DD having medical bills also, we are barely getting by ourselves. Sure would be nice if they did tax refund checks at the end of the year instead of waiting for the next year. That sure would help them out alot if they could get that money in December instead of Feb or March of next year.

 

[grlpwrd]

Originally posted by ducklite
Most of the info posted prior is accurate, a few things to clear up.

A 2nd mortgage is NOT a Home Equity Line. They are different things. A second mortgage is a set amount, you borrow it once and pay it back over time, like a regular mortgage or car loan. A HELOC is bascially revolving credit. you can keep borrowin, as much or as little as needed, and only pay interest on what you use.

They might have problems gettting financing right now, unless they get it at very unfavorable terms. Banks want to know you can pay it back, and with him out of work, that's questionable.

Actually having a HELOC open that you can draw on in times like this is a great thing as long as you can be disciplined to not use it except in an emergency.

Anne

I was going to post the same thing, too.

I would especially be careful about 2nd mortgages like someone else mentioned because if their situation gets even worse I believe they can lose their house because it's used basically as collateral.

If they have a 401K or something they could possibly take some out to stay afloat and pay a little of what is due, but there are tax penalties for early withdrawal, of course, but I believe medical emergencies are an exemption (I believe - but I am not positive). At the least they should check to seek all other alternatives before putting their home on the line.

Can either of them possibly get another job?

Oh..and here's a good message board: www.creditboards.com . I am not affiliated with them or anything, but their bulletin board is very helpful. There are posts regarding this matter.

GL to them!

 

[SWVA BGSU Fan]

How much equity does your friend have? The amount of equity in the home is a key factor in determining the route to take. The more equity in the home, the more sense it makes to take a second mortgage to payoff the credit card rates.

Many states will require a certain percentage payback on unsecured loans if a person files bankruptcy and has substantial assets or equity in their home.

It is my opinion that a person with considerable equity consider taking out a 2nd to take care of these debts. The terms should be more favorable than other types of loans.

 

[Gillian]

Originally posted by thelittlemermaid
They just want to hurry up and get the medical bills taken care of. It seems everytime the doctor bill and specialest bill isn't paid when it's due, for example after the insurance paid their part they get their bill say for $5,000 and it says it's due on Oct 9, if they don't pay that $5,000 on that date, they are being charged late fees {they are charging them $100 everytime the bill isn't paid in full on the due date. She figured it out to be $20 for every $1,000} Talk about the doctors and such being greedy!!! This has been happening for the past 4 months. Even though they might pay something on the medical bills, it really isn't getting them anywhere cause of the late fees.

Generally HOSPITALS will work out a payment plan if you call and ask. If you don't call and ask, they won't do it automatically. We were hit with an unexpected hospital bill 2 years ago and were able to make payments on it. I simply called and said it was too much for us to pay at once. They said, "how much can you pay monthly?" I told them and they said fine. They never charged us interest or a late fee.

As for specialists and such, again, they may be able to work out something if they ask. It may mean a lot of phone calls, but it's better to take the time to try to work something out than to get hit with a ton of late fees.

You're a good friend to try to help out!

 

[Chicago526]

If you friend is open about her finances, you may want to offer to sit down and look over her monthly household budget.

If they are truely serious about paying down all of their debt, they need to do the following:

Cut out ALL un-nessesary expenses. That means stop the cable, internet (unless needed for a home business)news papers/magazines, eating out, use as little heat/AC as possible (cold? put on a sweater. hot?, that's just too bad). Cell phones should be canceled if there is no penalty (like if they are under contract) or again they are crucial for business. Review the grocery budget, buy ONLY nessesary foods, cut out high priced junk food (its bad for you anyway) and eat cheap but nutritous foods (eggs, chicken, rice, veggies). No soda or other bottled drinks. If they have a car payment, they should look into selling the new car and buying a cheap (but sound) used car to stop the payments (this only works if they new car is worth more than the loan, with enough left over to buy a used car!). Everything except food, shelter, and transportation is NOT nessesary. Everything they buy every week/month needs to be examined. They will have to make tough choices. A second job isn't a bad idea if possible.

On top of that, the suggestions of calling the hospital/doctors and explaining the situation could be helpful. They can't get blood from a stone, it they aren't willing to work out resonable payments, then your friend may have to file bankruptcy and then the doctors get NOTHING. The docs should realize this and be willing to work out something to keep everyone happy.

 

[thelittlemermaid]

Thanks for the replys!! I have talked to my friend about the posts, she says they probably have $1,000 in equity in the their home since they refinanced last year.

As for the hospital they are on a payment plan with them, but they are charging them interest, she said 3%.

As for the doctor and specialest, they won't do it cause they told her they have been burned in the past by other patients. Sounds like alot have either filed BK or made payment plans and didn't pay. She did tell me that the hosptial is $20,000 and the doctor and specialest are $10,000 each.

For their bills, they hardly have any. The basic utilites, they have a car payment, but it's on a used car and the one CC they have been using. For food, she only buys what they need, but goes to the grocery every week. I don't know if that is good or bad. I like to buy enough food to at least last for 2 weeks. Of course that might not be good on what I am doing. Course I might have to get milk through the week, DS is a big milk drinkers. Anyways, she is just getting really depressed and I hate seeing her like this cause she has Bipolar.

It just would be nice if they could get the money that they need from a 2nd mortgage or some type of loan. Anyone know of a type of loan for that kind of money that they can get?

I just don't want her to get any more depressed and start thinking of things she shouldn't think about. I sure don't want to loose my best friend cause of medical bills. Plus I don't think her life insurance policy is enough to even cover them. If you don't know anything about Bipolar, from what I read, people who have it can just shut down and start thinking of things they shouldn't think of {suicide}. I lost my grandpa cause of suicide, but I will not loose my friend!

 

[Bosjoe]

Originally posted by thelittlemermaid
Thanks for all the replys!

I guess in the long run, is it possiable for them to get a 2nd mortgage even though they just refianced last year? According to her they refianced around June. So they have no if very little equity in their house.

Whatever they do is up to them. I just want to be able to give her correct info about a 2nd mortgage. She's the type of person that would rather talk to someone she can trust before going to a bank or some other place to talk to someone she doesn't know.

They just want to hurry up and get the medical bills taken care of. It seems everytime the doctor bill and specialest bill isn't paid when it's due, for example after the insurance paid their part they get their bill say for $5,000 and it says it's due on Oct 9, if they don't pay that $5,000 on that date, they are being charged late fees {they are charging them $100 everytime the bill isn't paid in full on the due date. She figured it out to be $20 for every $1,000} Talk about the doctors and such being greedy!!! This has been happening for the past 4 months. Even though they might pay something on the medical bills, it really isn't getting them anywhere cause of the late fees.

I really don't know what to tell her. I wish I could help her, but with DD having medical bills also, we are barely getting by ourselves. Sure would be nice if they did tax refund checks at the end of the year instead of waiting for the next year. That sure would help them out alot if they could get that money in December instead of Feb or March of next year.

Yes they can refinance evan if they just refinanced last year.
A heloc is a good idea as they only have to make the minimum payment of interest only, or they could pay more if they wanted to. Its a good thing to have in emergencies. They also have loans out there such as interest only loans. There are loans out there that have pay-options where you have choices to make certain amount payments these are good for people who are self employed and have thier income fluctuate. So it gives them flexability. I would have them contact a very good mortgage broker that can give them a couple of options. If there credit is still good they will have more options of having a lower interest rate.

Good luck

 

[jkovick]

The biggest problem with qualifying for any loan right now is that the husband is not working. With no source of verifiable income very few lenders would even consider a loan. Also, if they have no equity in their home right now they would have to look at one of those high risk, high fee, high rate type places that offer 125% financing. I would suggest that your friends contact a reputable accredited credit counseling firm. (Not one of those 1-800 GET OUTTA DEBT type places that advertise on late night TV, but a real non profit organization that can help them. )

 

[Gillian]

Some credit unions offer unsecured loans, but the rates are higher than home equity loans or what the hospital is charging them.

I don't know if it might help, but I have seen people referred to the discussion forums at creditnet.com Might be worth a look.

Lots of luck to your friend & you!

 

[Weluvdisny]

I work at a bank and type up mortgages and HELOCS. I can tell you that if someone refinances with us, they have to pay closing costs. Our HELOC program allows you to pay no closing costs as long as you have the loan for at least 3 years. Closing costs average around $2-3000.

Our bank goes by the appraisal amount or by the assessment on the taxes, whichever is higher to determine how much you can borrow.

Some banks are more leniant as to how they determine who qualifies for loans. It wouldn't hurt to try a few banks and explain the situation. I think credit unions can be more flexible.

 

[MrsPete]

You said she just wants it to be over; sounds like she's trying to make the financial problems "disappear" by getting a second mortgage. That isn't going to happen. The payment will still be there -- it'll just be in a different place. It doesn't sound realistic --especially with so little equity in place.

Judging from what you said about the bipolar stuff, I think you should really push her towards some type of counseling. Yeah, I know -- more money -- but I think it's money that she can't afford NOT to spend. If she's involved in a church, her pastor might be able to provide counseling. If not, the county's mental health could be an option.