Obtaining a second mortgage may be a useful tool when helping prospective buyers and current homeowners reach diverse financial goals. A second mortgage allows you to use any equity that you have in your home as security against another loan.
Below are three tried and true strategies that may be implemented with the use of a second mortgage:
During the purchase of a home, the buyer has less than a 20 percent down payment.
In this situation, a second mortgage could be used to make up for the shortfall between the borrower’s down payment funds and the requisite 20 percent down payment, to avoid mortgage insurance. Mortgage insurance is a product that is designed to protect the lender in case the borrower defaults on the loan; this policy provides no benefit to the borrower.
Generally, Home Equity Lines of Credit (HELOCs) are repaid on a 30-year amortization with the first ten years of the loan having interest-only monthly payments. After the initial ten years, the HELOC will fully amortize (principal and interest payments) using a 20-year term.
In this example, the home buyer should compare the monthly cost between one loan with mortgage insurance and a first/second mortgage combination while also recognizing that a HELOC is an adjustable-rate mortgage (ARM), meaning that the interest rate is variable and could increase which would, accordingly, increase the monthly interest-only payment.
A home is being acquired, but the buyer is not selling their current property until after the new house closes. For example, the new home is being purchased for $600,000. The buyer expects a total profit of $200,000 but only has $80,000 currently available for a down payment.
Since the vast majority of jumbo home loans (loans valued over $453,100) require a 20 percent down payment, the best available option for this kind of scenario would be a first/second mortgage combination. In this example, the loans would break down like this:
Conventional First Mortgage: $453,100 (76%)
Second Mortgage (HELOC): $86,900 (14%)
Down Payment: $60,000 (10%)
This example is win-win for the home buyer, as they may purchase their new home before selling their soon-to-be former residence and pay off the second mortgage with the proceeds of the sale. It is essentially, a reverse down payment and may be highly effective.
A homeowner wants to make home improvements, consolidate debt, extract funds for a down payment on a second home, investment property or build an Accessory Dwelling Unit (ADU).
These are all classic opportunities to utilize the second mortgage. Second mortgages are especially common and more widely used in the current market due to the significant gains in real estate appreciation over the last few years. A fixed-rate second mortgage or HELOC allows homeowners the flexibility in the achievement of these goals. Finally, second mortgages serve as valuable tools if the interest rate on the existing first mortgage of the subject residence is substantially lower than what is being currently offered.
Hopefully, these scenarios give you a better idea of when a second mortgage may be utilized. And, perhaps, you may apply these strategies to your financial situation. As a seasoned Senior Mortgage Banker, I am here to help with all of your primary or secondary mortgage needs.
As always, I am happy to help answer your lending questions – feel free to Contact Me at any time!
Senior Mortgage Banker • NMLS 229632