Introduction

Due to their tax advantages over non-deductible debts, second mortgages are a common way to pay for purchases and consolidate debt. Second mortgages are also referred to as "home equity loans" because they are literally second loans that are secured by real estate. Second mortgages are also growing in popularity as "piggyback loans," which are a type of home financing in which a property is bought using mortgages from two or more lenders with the risk being distributed equally among them.

Homeowners have taken advantage of the low interest rates over the past ten years to refinance their first and second mortgages with new ones that have lower rates, as well as to purchase second mortgages for their own use. Fixed rate mortgages ranged in price between 7.5% and 9% in the early 1990s. Homeowners considered refinancing at better rates as rates started to decline in the late 1990s.

For fixed-rate mortgages, mortgage rates decreased to around 4%.

The mortgage industry also provided a wide variety of adjustable rate mortgages, some of which had negative amortisation rates as low as 1.25%.

For instance, a homeowner with a fixed 7.5% mortgage can reduce their credit card payments by using the equity in their home. They can obtain a second fixed-rate mortgage at a rate of 5% and will save a lot of money by doing so. As opposed to their first mortgage and the high credit card debt payments, the combined monthly payments on the first and second mortgages will now be significantly lower.

If the homeowner in the aforementioned example chose to use an adjustable rate mortgage to lower their payments, they could have a rate that was lower than the fixed rate mortgage but would be subject to changes based on an index. The index may be calculated using the prime rate with a tolerance of 2% to 0%. The interest rate on this kind of loan in 1995 would have been 4.5 percent. This loan's interest rate would be close to 9% if it were offered today at prime plus 1.25%. with a loan's cost in the current market coming to more than $2,000 in total.

The 80-20 rule was used in the past to finance home purchases; today, homes can be financed and refinanced at 100% or even 125%. The conventional 80-20 formula required a 20% down payment and 80% financing of the purchase price.

Sometimes a lender will mandate PMI for properties that are financed at a rate greater than 80% of the property's fair market value.

Describe PMI.

It is a private mortgage insurance policy that the lender may demand if the loan balance is higher than 80% of the value of the mortgaged property.

How is a PMI terminated or cancelled?

The Homeowners Protection Act of 1998 requires mortgage lenders to automatically terminate PMI once the homeowner reduces the balance to 78% of the value if the loan is current. The termination will occur on the day the mortgage becomes current if the loan is past due. Any time the loan balance is less than 80% of the value of the property mortgaged, homeowners have the right to request the cancellation of the PMI insurance.

Higher future payments and added mortgage insurance are the main drawbacks of refinancing first and second fixed rate mortgages with adjustable rate mortgages.

The Benefits of a Second Mortgage:

When compared to credit card rates and variable interest rate home equity lines of credit, second mortgages enable you to withdraw large sums of money at relatively lower fixed mortgage interest rates, whether you have good credit or bad credit (HELOCs).

Tax deductions for second mortgage loans could total 100%.

You are free to use the funds however you see fit, including debt consolidation to lower your payments and save a lot of money each month.

Instead of having to refinance your current mortgage, you can simply add a second mortgage without changing the rates or terms of your first loan.

Second mortgages typically have low or no closing costs and fund quickly. Examples include loans with a 125% LTV and interest-only options that fund more quickly and frequently come without appraisal fees from Mortgage.

Second Mortgage Drawbacks:

Your mortgage lender has the right to foreclose if you are late on payments, which means you risk losing your home.

Interest rates on second mortgages are higher than those on first mortgages. Most lenders will charge higher fees and higher interest due to the risk factor with these subordinate liens.

Some second mortgages have significant upfront costs, closing costs, or other annual fees, as well as prepayment penalties and balloon payments.