Which mortgage to pay

Who to pay when you can't pay the mortgage

21 Jan Which mortgage to pay

Who to pay when you can't pay the mortgageWhen there isn’t enough money to make current mortgage payments on a first and second deed of trust, you are generally better off paying the first mortgage rather than the junior one.

Homeowners find it tempting to pay the junior lien since the monthly payment is often smaller than the payment on the first. No matter how appealing it is to keep at least one lender current, that’s the wrong order of importance. Pay the senior mortgage first.

Why? Junior lien holders who aren’t getting paid are much less likely to foreclose on California real estate than the first lien holder.

There are several reasons that the second mortgage is less important. In a falling real estate market, there may not be enough value in the property to make it desirable for the second to foreclose. A junior lien holder who forecloses takes the property subject to the obligation to make payments on the senior debts. So if the second mortgage holder forecloses, it must pay the first lender, the property taxes, and the maintenance costs pending its sale on the open market. That’s often not an appealing prospect for the junior lender.

It may be worth exploring whether the second lien can be stripped off and voided in a Chapter 13 bankruptcy case. Pay the second and you may as well have flushed twenties down the toilet.

Further, remember that the homeowner has no personal liability for the real property taxes. That means that the county can’t sue you and garnish your wages for unpaid property taxes. The county’s only remedy is to foreclose its lien at a tax sale. And it takes 5 years delinquency before that happens. So, but for the interest rate on unpaid property taxes, the tax bill is even a less compelling place to put money when there isn’t enough to go around.

So, first things first: pay the first mortgage, even if it leaves the junior lien in arrears.

Image courtesy of Lifesupercharger.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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