A plethora of reasons are responsible for the need of a large amount of money, like funding your education, consolidating a few credit card balances and even domestic requirements like home repairs. So a second mortgage can be easily taken out against property which already has a home loan on it.The lien word refers to the lender’s right to possess and seize the property which is kept as a collateral .
To clarify this term you should know that a second mortgage is taken out as a subordinate to to your existing mortgage, again which is an extended finance for home purchase or to tap equity after your primary financing. It is the lien taken out against the portion of your home that you have paid off.
Borrower’s who typically are unable to make necessary down payment and are looking for a loose mortgage underwriting standards, most commonly apply for what is called an additional first mortgage and home equity line or loan as a part of combo plan. So you are provided financing in a single home loan by the both options .Therefore when it is difficult or expensive to get a single mortgage with a very little down payment, homeowners opt for two loans instead, to gain loan approval.
The PIGGYBACK loan:
This is the second mortgage which originates concurrently with the first mortgage to finance the purchase of home in a single closing process.
In a conventional mortgage home buyers are permitted to borrow 80% of the properties’ value while placing down payment of 20%. So the option of opening a second mortgage is specifically applicable to buyers who have insufficient funds to pay 20% down payment and wish to avoid the private mortgage insurance [PMI] expense.
80 / 10 / 10 loan or 80 / 20 loan. The more common one is the 80b/ 10 b/ 10 in which the home buyer is granted 80% LTV in the primary mortgage and 10% LTV on the second mortgage with a 10% down payment; that is you’re putting down just 10% and keeping your first mortgage at 80% LTV to avoid mortgage insurance.
In 80 by 20 mortgage 80% is the LTV on first mortgage and 20% is LTV on the second mortgage so this method in contrast, does not require a down payment.
Stand alone second mortgages are opened subsequent to the primary mortgage loan to access home equity without disrupting the existing arrangement. So these are actually an extra source of funds after your first mortgage transaction is closed, as they are taken out separately.
Typically a home-buyer purchases a primary mortgage for full amount and pays 20% down payment. During the loan term the properties equity is increased by monthly mortgage repayments and appreciating real estate prices. In such cases, stand alone second mortgages are able to use the properties equity as collateral to access additional funding.
With unsecured personal plans lenders are exposed to get a level of risk as collateral is not required as a security, so the lender is unable to sell the assets to cover the outstanding debt. Accordingly second mortgages not only ensure access to greater amounts but lower interest rates as compared to unsecured loans .The point to be kept in mind is that you need equity in your home to execute second mortgage transaction .
Home equity lines of credit are open ended loans, where the among borrowed each month may vary at homeowners discretion. They offer a flexible repayment schedule and are subject to variable interest rates which may increase or decrease during the loan term.
Borrowers can have an access to the line amount which is predetermined but are not required to draw amounts if they don’t need it to avoid unnecessary interest or credit. This means the minimum debt level is maintained as monthly repayments correspond only to the amounts used rather than the full amount available.
Most commonly availed by the borrowers who fears unanticipated future expenditure as well as credit shocks to prevent down record on their credit history.
HOME EQUITY LOAN OR LUMP SUMS:
This type of mortgage is granted for the full amount at the time of loan origination the interest rates on such loans are fixed for the entire loan term and both of them are determined when the second mortgage is initially granted these are closed ended borrowers harsh required to pay both the interest and the principal as repayments on monthly basis in a process of amortization. Typically used for debt consolidation or current consumption expenditures .
The characteristic feature of these are that interest rates are quite high .The second mortgage rates can be double those of first or sometimes in double digits.Variable rates are observed here as they are tied to the prime rate. Also depends upon the property type,type of second mortgage and equity in your home. Higher interest rates are result of higher risk to lender as they get paid out second in case of foreclosure. Another reason is lower the loan amounts higher the interest .
PROS OF SECOND MORTGAGE:
-smaller or no down payment
-breaking up of single amount into two separate loans leads to higher combined LTV and overall lower interest rate.
-avoid PMI charges.
-keep loan amount below a conforming limit.
-additional money allowance to homeowner.
-avoidance of refinancing on existing mortgage.
-reduces home equity
-limit your borrow ability in-case you have to go for a third loan
-More debt and additional ,monthly payments.
-Association with prime rate you may face higher monthly payments
-Additional fee may be charged and minimum draw amounts required.