Second Mortgages

• If, for example, you have a $200,000 house, and a $125,000 mortgage, you have $75,000 in equity you can borrow against. Most second-mortgage lenders will only let you borrow against part of the equity; lenders that let you borrow against all of it will charge higher interest rates. To obtain the loan or line of credit, you'll have to go through many of the same procedures, such as an appraisal and a credit check, that you did to take out your first mortgage.
  
  

Lienholders

• Second mortgages offer better interest rates than most credit card or consumer loans because they give the lender a lien or claim on your houses. If you fall behind on your payments, the lienholder can legally foreclose. It may not want to do this, however, because this lien is junior to the first mortgage; no matter who initiates the foreclosure, the senior lien must be paid off first. If your house isn't worth enough to pay both loans, the junior lienholder gains nothing by foreclosing.
  
  

Foreclosing

• If your home is worth more than both loans, your home equity lender may decide foreclosure is worthwhile. Some lenders will even pay off the first mortgage before they foreclose in order to eliminate the senior lien. If foreclosure doesn't pay enough to settle the second mortgage, the lender may file for a deficiency judgment to get you to pay the remainder of the debt. Some states don't allow this, so check your state's laws.
  
  

Solutions

• Because it's often difficult for second-mortgage lenders to collect, your lender may be willing to accept a lump sum payment in return for wiping out the remaining debt. Alternatively, you could file Chapter 13 bankruptcy. The Chapter 13 debt-payment plan gives you at least three years to catch up on back payments on your home equity loan or mortgage. If your home is worth less than the first mortgage, you can ask the bankruptcy court to declare that your home is no longer collateral for the second mortgage, which makes it possible for bankruptcy to wipe out the debt.