Ins and outs of Bad Credit Second Mortgages

Ins and outs of Bad Credit Second Mortgages


With a recession waiting in the wings to be officially acknowledged, American consumers find mortgage credit in short supply at a time when they need it most. For many, the answer to their problems may lie in procuring a "bad credit" second mortgage.

A bad credit second mortgage is just like any other second mortgage, except that it's extended to those borrowers who have less-than-stellar credit histories. The loans are specifically tailored to customers who may be unable to get credit or loan approval through conventional channels like prime-lending banks and mortgage companies. Those who specialize in making bad credit second mortgages structure their loan portfolios so that they can assume higher levels of risk than ordinary lenders, and they exist for the sole purpose of making good loans to people with bad credit.

Countrywide Mortgage victims

One of the most powerful sources of bad credit second mortgages is-or was-Countrywide Mortgage. The company famously imploded because it made too many loans to those who couldn't repay them. As a result, the market for bad credit second mortgages is now pretty thin. You won't find them as easily as you could two or three years ago, but if you're willing to pay a premium in terms of higher interest rates or closing costs, they are still out there and available.

Home equity loan solution

The monthly payments of about two million homeowners with adjustable-rate loans (ARMs) are scheduled to rise as much as 60 percent during the next 18 months. Refinancing to more manageable and affordable fixed-rate loans is the best solution, but traditional lenders are reluctant to approve refinance loans in today's volatile financial environment. Many homeowners have relied upon home equity loans to pay bills, but housing values have fallen, eliminating that source of funding. Credit card debt is also increasingly expensive-despite the recent drop in prevailing interest rates-and basic household expenses for items like gasoline and groceries are inflated beyond belief. As the crisis deepens, bad credit second mortgages are quickly emerging as one of the only remaining solutions.

Some consumers use them temporarily to regain their financial footing. Others turn to them for long-term mortgages, or for a convenient way to borrow funds for business, college tuition, or home improvement projects. Whatever the reason for needing cash or financing-particularly for those who have less than spectacular credit-bad credit second mortgages are an alternative worthy of consideration.

No free ride

Don't look to a bad credit loan to cure bad spending habits or a lack of financial responsibility. Credit is never free. Because it involves putting your home up for collateral, the use of a second mortgage can be risky. Borrowing against your home should be reserved for adding, not depleting, home equity. But if you can use a bad credit second mortgage to lower your debt, or boost the value of your home as a sustainable asset, it's a path worth pursuing.