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How To Reduce Your Mortgage Payments While Avoiding Foreclosure

If you’re like many homeowners, your home is encumbered with a second or third mortgage (or deed of trust), and perhaps a home equity loan. Numerous articles describe you as using your home like an ATM machine. Having all these secured debts on your home is tantamount to a juggler having too many balls in the air — at least one must fall, sooner rather than later.

If, for one reason or another, you just can’t keep up, you may be able to avoid foreclosure if you pay the right loan and either blow off the rest, or at least make reduced payments. In almost every case, the right loan to stay current on will be your first mortgage or deed of trust. While I’m always hesitant to tell people to stop meeting their shelter obligations in full and on time, sometimes it’s the only rational thing to do — as wrong as it may feel to many of you. If reducing the amount you throw at your home every month will let you stay there and keep your ahead above water, at least until you can work out a better solution, I’m all for it.

How does this work? When you originally took out the loan to buy your home, you agreed to have the loan (or loans) secured by a mortgage or deed of trust (depending on the state where the property is located). (For the rest of this blog, I will use the term “mortgage” to refer to both mortgages and deeds of trust.) By recording the mortgage in your local land records office, the lender created a lien (legal claim) on the property, which can be enforced by foreclosure if the payment terms of the mortgage document aren’t met. As you probably know, in foreclosure the property is sold to make good on the promissory note underlying the mortgage.

The main loan you used to buy your home is termed a “first mortgage.” Why first? It’s almost always recorded first and gets paid first in case of a sale. In the same manner, a second loan secured by the home is a second mortgage. For example, it’s common to use a first mortgage to pay 80% of the sale price and get a second mortgage for the additional 20%. And that’s not all. In the bubble years, home value appreciation supported additional loans against the home, often in the form of a home equity lines of credit. As with the first mortgage, the lender’s primary remedy for a default on these additional loans is foreclosure. (more…)