Will a New Mortgage From a "Friend" Save His House?

August 7, 2006

"Two months ago I lost my job, I have since been late on my credit cards, most of them are maxed out, and I am two months late on my mortgage payments. I had a chance to refinance early on but the rates were very high so I turned them down, now I can’t refinance at any rate. A friend of mine has offered to lend me the 30K I need on a second mortgage at 15%, plus I must pay all the fees, and I must repay him in full after 3 months. To repay him, I would have to refinance at that time. Should I?"

No! The only thing this deal can do for you is delay the inevitable for a few months, at the cost of a substantial amount of your remaining equity.

I assume you have equity in the house because your so-called friend knows that you won’t be able to repay him in 3 months. The only way he can get paid is from a foreclosure sale, or by purchasing the house from you. In either case, there must be enough equity in the house to cover the first mortgage balance and arrears plus the amount owed him by you.

There is no possibility that you will be able to refinance in 3 months. Your equity will be reduced by the second mortgage and your credit won’t be significantly different, even if you have paid off all your overdue credit cards. The process of rebuilding your credit will take years, not months.

Your best option now is to sell the house ASAP and retrieve as much as possible of the equity you have in it.

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