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Is it Smart to Pay on that Second Mortgage if Your Home is Underwater?
If you own an underwater home, should you continue to pay on your second mortgage? Lots of people stop paying, and they don't worry about it. Why don't they worry about it, you may ask? Because the second mortgage holder probably has zero equity. Nada. No security for that loan. If there is nothing securing that loan, the mortgage lender is unlikely to file for foreclosure because there is no financial gain to do so.
When a second mortgage lender files for foreclosure, to perfect it, the lender needs to make up the back payments to the first lender, if any, and take over the first loan after foreclosure. Lenders will do this if there is equity; however, if the first mortgage is underwater, too, who wants the house? Not the second, that's a given.
Let's say you paid $500,000 for that home in Elk Grove, California. You financed it through an 80 / 20 combo loan, which was so popular in 2005 and has pretty much vanished today from the face of the Earth. So, you took out a $400,000 first mortgage and a $100,000 second mortgage. Today, that home might be worth $225,000, if you're lucky. Go over to ... more

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