A second mortgage can be an important financial tool in specific situations. However, it is important you understand what it really is, and does, so that you can be sure you use it wisely.
The concept of a second mortgage is intriguing, and there is an article by Arvin Sahkian that gives us some great info on it. In some cases, a second can be a beneficial way to get the cash you need to improve your home. In other cases it can be used to combine with a first mortgage in order to purchase a home. However, if you do not utilize it properly, it can be a quick way to get in over your head financially. So, let’s take a closer look at Sahkian’s perspectives.
Definition of Second Mortgage
A second mortgage is a type of financing that is made on a property while the first/primary mortgage is still in place, or in combination with a first mortgage when purchasing a new property.
If a property is foreclosed on by a lender, the first mortgage will get paid off first and if there is anything left over, the second mortgage will get paid off next. Therefore the risk to the lender issuing a second mortgage is higher.
Second loans are riskier for lenders because in event of a default it is only paid off AFTER the first loan is paid off, so a second mortgage is usually for a significantly smaller amount and for a higher interest rate.
When Would a Second Mortgage be Necessary?
Since a second mortgage is usually for a smaller amount and a higher interest rate, why would a borrower choose to obtain a second mortgage?
There are actually two distinct times when such a loan is necessary-during the initial purchase OR during a refinance:
1. During a Purchase
One reason many people choose a second mortgage is because they cannot get a single loan for the amount they need to purchase a home. Sometimes getting a first mortgage and then a smaller, supplementary mortgage will help you to be able to purchase a home you could not otherwise qualify to buy. Another reason you might obtain this loan during purchase is if the house needs significant repairs or upgrades in excess of the purchase price.
2. During a Refinance
When you refinance a home, often a second mortgage is chosen to help you access equity in your home. This can allow you to take care of necessary repairs or pay off other higher interest rate loans, such as a business loan or personal loan.
Like any type of mortgage, the credit requirements of a second mortgage may vary from case to case. There are no certain credit score requirements to obtain a second mortgage. However, you will often find that getting your score above 600 and ideally 650 is what it takes to get lenders to approve you for a loan that won’t have a higher interest rate than you may be comfortable paying.
The document requirements of a second mortgage should be quite simple for you, assuming you already have the first mortgage. You will usually need the same type of documentation as a first mortgage. Most lenders will require that you prove ownership of the home and give some documentation about your income and ability to repay the loan.
Example of Second Mortgage Payment
The best way to see how a second mortgage will affect you personally is see how your payments will work. A simple example would be:
- You apply to borrow 40,000 to redo your kitchen and basement
- You qualify for a 5% interest rate and a 15-year repayment term
- You will have a $316 monthly payment due each month for 15 years
Advantages of Second Mortgages
The main advantage of a second mortgage is that it allows you access to money you may not otherwise be able to obtain. If you are using the money to improve your home or pay off higher interest rate loans, it makes perfect sense to choose this type of financing and improve your overall financial picture.
Another advantage is that you do not need to refinance your first, primary mortgage if you are looking to cash out. Many people have a very low rate with a good term on their existing loan, so a second mortgage gives you the opportunity to tap into your equity without touching your first mortgage.
Disadvantages of Second Mortgages
The disadvantages of second mortgages occur when you borrow more than you are able to pay in the future and end up getting your finances into a difficult place. If your home loses value, a second mortgage could make it harder to get back to a comfortable place financially because you will not have the ability to refinance and consolidate your two mortgage together.
Additionally, there are closing costs associated with this type of loan, so you must be careful of the added expenses as well.
Don’t Rush to Judgement
A second mortgage is a useful tool for some homeowners, but it isn’t always the perfect solution. You should be aware of the credit and document requirements before you apply for a second loan. Also make sure you learn more about the process and costs involved before you dive in. You will be more likely to make a smart borrowing decision when you know exactly what you are getting into, so there is no reason to rush to judgment.
For more information please contact me for a referral to a qualified, professional mortgage broker who can walk you through exactly what you need to know for your situation. For more information on Chad Romig’s real estate services please visit www.PurposeRealEstate.Guru.
A closing statement, also called a HUD-1 Statement or Settlement sheet, is a form used in real estate transactions with an itemized list of all the costs to the buyer and seller. Below I have more info to help break down our understanding of the HUD-1.
A closing agent prepares the closing statement. It’s a comprehensive list of every expense that the buyer and seller must pay to complete the real estate transaction. Fees listed on this sheet include commissions, mortgage insurance, and property tax deposits. It includes costs such as loan origination fees, appraisal fees, inspection costs and mortgage broker fees. It might also itemize fees to pull the borrower’s credit report, escrow funds, title search fees and fees for services provided by lawyers, notaries and closing agents.
For transactions that do use a closing statement, the buyer and seller usually sit down with a professional such as a lawyer or real estate agent, to review the statement and ensure everything is correct. Even after the statement is prepared, it might include last-minute changes that both parties need to review for accuracy. The statement lists the fees in two columns, one on the left side of the sheet for the buyer’s expenses and one on the right for the seller’s expenses. The amount of cash the buyer must give the seller has its own entry at the bottom of the document.
Closing statement example
If a real estate transaction involves a closing statement, both the buyer and the seller should receive it at least one day before the completion of the transaction. In some cases, however, it’s not available until a few hours before the closing. Both parties will have a detailed and itemized record of everything they’re required to pay to complete the transaction; they should know where all of the money is going and how much they’re spending. For more information on what your personal costs would be, email Chad Romig at ChadRomigRealtor@gmail.com.
Thinking of buying a home? Learn what you need to do before you start house hunting, then call Chad at Purpose Real Estate!
One of the most common questions I’m asked when touring buyers through homes is “what’s up with all the crazy abbreviations when I’m looking at houses?” Yes, the alphabet soup of real estate can get overwhelming.
Here’s some background: Realtors only have a limited number of characters for fields on listings, so when there’s a long list of features that come with a house, we must get creative in how we state things in the MLS. Here’s a quick overview of some of the more common abbreviations Realtors use that I have run across over the years. If you come across one and it’s not listed here, please comment and add to my list!
- BR/BA – Bedrooms/Bathrooms
- DOM – Days on market
- R1 – zoned for Residential purpose
- W/I – Walk In ( as in a walk in closet)
- W/W – Wall to wall (as in carpet)
- FP or FPL – Fireplace
- HDW – Hardwood flooring
- SP – Swimming Pool
- ELFs – electric light fixtures
- B/I – “built-in” (usually used with kitchen appliances and shelves)
- W/D – washing machine and dryer
- SS – Stainless steel (usually used before listing the kitchen appliances)
- F, S, D/W, MI – ‘fridge, stove, dishwasher, microwave’. Range hoods generally aren’t listed and are not guaranteed to be included.
- CAC – central air conditioning. Also CA and CH for central heat or air.
- CVAC (and att) – central vacuum and attachments
- GDO+R – Garage door opener(s) and remote(s)
- HWT – hot water tank – occasionally you’ll find these owned by the homeowner and not rented
- R/I – “roughed in”, meaning the wiring/plumbing is there, but the item needs to be installed, like a basement bathroom
- LA – Living Area OR Listing Agent (the agent working with the seller of the home) depending on context
- Owner is RREA or LA is related to RREA – The listing realtor is the home owner, or the listing agent is related to the homeowner. This is important to note as the realtor has an emotional attachment and/or might not be making much – if anything – as a commission on the sale.
I hope this was helpful. Please feel free to share and comment below on any others you think of or have questions about! And you can always contact me through my website at www.purposerealestate.guru.
You’ve most likely heard the rule: ‘Save for a 20-percent down payment before you buy a home’. The logic behind saving 20 percent is solid, as it shows that you have the financial discipline and stability to save for a long-term goal. It also helps you get favorable rates from lenders when you are ready to buy.
But I have learned there can actually be financial benefits to putting down a small down payment—as low as three percent—rather than parting with so much cash up front, even if you have the money available. Here’s a few things to consider.
The downsides of a small down payment are pretty well known. You’ll have to pay Private Mortgage Insurance (PMI) for years, and the lower your down payment, the more you’ll pay. You’ll also be offered a lesser loan amount than borrowers who have a 20-percent down payment, which will eliminate some homes from your search.
The national average for home appreciation is about five percent. Keeping in mind the appreciation of your home is independent from your home payment, remember that whether you put down 20 percent or 3 percent, the increase in your equity is the same. So, if you’re in a position to look at your home as an investment, putting down a smaller amount can lead to a higher return on investment (ROI), while also leaving more of your savings free for home repairs, upgrades, or other investment opportunities.
THE HAPPY MEDIUM
Of course, your home payment options aren’t binary. Most borrowers can find some common ground between the security of a traditional 20 percent and an investment-focused, small down payment. Your trusted real estate professional can provide some answers as you explore your financing options. Please contact me to discuss strategy, options and questions.