For Owners of Second Homes: Dealing with Your Mortgage

In the 1996 film The Rock, character Stanley Goodspeed finds himself stuck on Alcatraz Island with an ex-con, a team of irrational Marines, and a supply of deadly gas warheads. Stanley doesn't have a lot of options for survival. If you have a bad mortgage on your second home, you might know exactly how Stanley feels.

Since the mortgage crisis began a few years ago, the U.S. government, the FDIC, and big mortgage lenders have rolled out various programs to help homeowners survive these turbulent times. Unfortunately, the vast majority of these initiatives are geared toward the ownership of primary residences. In other words, owners of second homes need not apply.

The rationale for excluding second homeowners is reasonable. Rule-bending legislation is not intended to help people keep assets they can't afford; it's supposed to keep people from becoming homeless. That's no comfort when you're facing a foreclosure on your second home.

What are your options? Like it or not, you may only have four: get a mortgage refinance, sell the property, declare bankruptcy, or let the lender foreclose.

Refinance second home

Mortgage rates are low right now, which makes it a great time to engage in the refinance second home process. This can be more expensive and more difficult to obtain than a first mortgagerefinance. But if you can get the deal done, you'll keep your credit and your investment intact. Your biggest challenge will be the home's value. If it has fallen substantially, a mortgage refinance may be impossible, unless you can borrow enough money from another source to pay down the mortgage debt.

Cool market for property sales

Selling is problematic because the deal may not happen quickly enough or for the right price. Explore outside-the-box alternatives, such as offering a lease-to-own deal, or giving special incentives to speed up the sale. If those aren't workable, talk to your tax advisor about the implications of a short sale. In this process, the lender takes the proceeds from the sale of the home and writes off the remaining debt. The forgiven debt on a second home mortgage could be considered taxable income, though. Once you know what that impact might be, approach your lender with the short sale idea.

Bankruptcy hurts

Bankruptcy court judges have the authority to modify second home mortgages. This is a last resort option, though, because you can't predict how the court will address your particular situation.

Let the chips fall

If the rest of your finances are in good health, and you have no workable options for the second home, ask your lender about a deed-in-lieu of foreclosure. This strategy at least allows you to move on from the situation relatively quickly. It's not an ideal solution, but it's better than being stuck on the foreclosure island, waiting for your eviction notice.