A second mortgage or junior-lien is a loan you take out using your home as collateral, while you still have another loan on your home.
Home equity loans and home equity lines of credit are common examples of second mortgages. Some second mortgages are “open” (meaning you can continue to withdraw cash up to the maximum amount of the credit and, as you pay off the balance, you can withdraw again up to the same limit) and other second mortgages are “closed” (in which you receive the full amount of the loan in advance and cannot withdraw it again).
The term “second” means that if you can no longer pay your mortgages and your home is sold to pay off debts, this loan is paid second. If there is not enough equity to pay off both loans in full, the second mortgage lender cannot collect the full amount owed. As a result, second mortgage loans often have higher interest rates than first mortgage loans.
Taking out a second mortgage will increase your total debt load. Every time your total debt load increases, you make yourself more vulnerable should you experience financial difficulties that affect your ability to pay your debts. It is important for you to know that home equity loans or home equity lines of credit are very risky, if you cannot pay, you could potentially lose your home since you are using its value as collateral.
When you use home equity to pay off other debts, you’re not really paying them off. You are simply using one loan to pay off another. Interest rates may be lower in the short term, but that’s only because you’re using your home as collateral. The risk is that if you can’t pay the home equity loan, you could lose your home.
Also, if you take on more debt, it could make it harder to pay off that new debt and current loans. For example, taking out a mortgage to pay off a five-year car loan may have you making payments and paying additional interest for ten, fifteen, or thirty years. Be careful about exchanging short-term debt for long-term debt, at a higher cost to you.
How to transfer a mortgage to another person
If you need to get out of a current home loan quickly, you may not have time to put your house on the market and wait for it to sell. However, if you transfer your debt to another individual, that person can take over your mortgage payments, giving you the freedom to move or buy another home elsewhere. The person to whom you transfer the mortgage loan has the benefit of being able to obtain your interest rate. If your home is under warranty, you may even receive a benefit from the transfer.
Check your original loan papers to see if there is a sale expiration clause. If your mortgage loan agreement contains such a provision and you attempt to transfer ownership of the property without notifying the lender, the lender may demand immediate repayment of the loan.
Contact the lender and explain that you want to transfer your mortgage to someone else. Each mortgage lender handles transfers differently, but your lender will likely mail you an information packet along with paperwork to sign.
Have the new owner call your lender and request an assumption packet. This contains information and instructions for the person who wants to take responsibility for your mortgage loan.
Fill out and return the paperwork from your mortgage company. The new owner must do the same.
Negotiate with the buyer to pay a portion of your home warranty. If you don’t have a warranty, that’s not a problem. However, if your home is worth more than what you owe your lender, it’s common and reasonable to ask the seller to pay you a portion of your collateral in exchange for the transfer.
Wait for the company to process the transfer request and conduct a credit check on the new owner. The person receiving your mortgage loan must meet your lender’s credit and income requirements.
Visit an attorney and prepare a release of liability document. This document releases you from the responsibility of paying the mortgage after the transfer. Therefore, in case of non-payment of the mortgage by the buyer, the lender cannot request said payment from you.
Pay the lender’s transfer fee. The transfer fee may vary, depending on the lender. FHA loans, for example, have a transfer fee of $500. You or the person assuming the mortgage must pay the fee, or you can split the cost between the two of you.
