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2nd Mortgage Defaults Hinder Home Equity Market

Since 2007, loan defaults on 2nd mortgages have skyrocketed as millions of borrowers chose not to make the payment on their home equity loan. Borrowers have taken out second mortgages for many reasons, such as, home buying, bill consolidation, education and home remodeling.

The highest rate of default of the home equity market is the purchase money second mortgage. These were the second loans that were frequently used with 100% financing. Lenders offers 80-20 home loans that included a 1st mortgage at 80% of the purchase price paired with 2nd mortgage at 20% of the purchase price. When borrowers took out a second mortgage for debt consolidation the default rate falls significantly. Homeowners that take out a 2nd mortgage for consolidating credit card debt are much more likely to pay their 1st and 2nd loan payments.

Looking ahead we are hearing whispers about private money lenders releasing some new home equity products in 2012. Most economists agree that until the housing market recovers in the U.S. that many popular loan programs will stay off the table because investors simply don't want the risk.

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