Second mortgages represent different things depending on the homebuyer and their situation.
Some use a “second” to help them buy a home, while others use the second – sometimes referred to as a home equity line of credit, or HELOC – as a way to pay off debt or do home improvement.
Joann Dycus, mortgage loan officer with Prime Lending in Abilene, said there was a day when second mortgages were more popular than they are today.
“The most popular reason people did them (second mortgages) was the mortgage insurance,” said Dycus. “If the buyer could come up with 20 percent down, they didn’t have to have mortgage insurance; so often the purchase was structured with an 80-percent first and a 20-percent second.”
Dycus added that people were almost literally getting into their home with nothing down, but for the most part – and especially because of today’s lower interest rates – the idea isn’t as attractive.
In addition, the requirements for home buying have become more stringent in the wake of the 2008 real estate “bubble.”
By definition, a second mortgage is a lien on a property which is subordinate to a more senior mortgage or loan. The second mortgage falls behind the first mortgage, and this means second mortgages are riskier for lenders and thus generally come with a higher interest rate than first mortgages. This is because if the loan goes into default, the first mortgage gets paid off first before the second mortgage.
“There used to be several companies that did second mortgages, but that has really changed,” said Chris Love, co-owner of Love and Love Mortgage in Abilene. “People still do HELOCs with some regularity.”
In some cases, homeowners will use the option of refinancing their first loan, and if there is sufficient equity, take cash out at closing. This avoids the need for a second loan.
“In Texas, homeowners are limited to 80 percent of the home equity, so often, they think they can get more money than they actually can,” said Love.
“The appraisal is the real driver in the case of a re-fi (refinancing loan),” added Dycus. “If the home appraises for high enough, then the buyer can usually get what they want in terms of cash out.”
There are few restrictions on how one can use the funds from a second mortgage. Many people use these to fund big expenditures such as home improvements or repairs, to buy a second home or to pay off a big debt. Experts say it’s generally not a good idea to use it for something frivolous such as a vacation or new clothes, because the buyer is risking their home in the process.
Love said there are three key tips to deciding whether to consider a second mortgage.
“Go local for lending,” he said. “There is something better about face-to-face accountability, and when you work with a local lender, you’re sitting across the desk from a person you can see, as opposed to some of these national online lenders. The second thing is to provide the requested documents as quickly as possible; this helps the process move forward smoothly and quickly. Finally, keep your credit in a good state. A good credit score is a significant factor in the whole process.”
Dycus said that because second mortgages generally have higher interest rates, and shorter payouts, it is almost always more advantageous to the home buyer to purchase the home with one loan and pay for mortgage insurance.
“When you put a first and second together, you’re not always getting as good of a deal financially,” she said. “You may ultimately end up making a higher payment each month.”
Generally, when considering the application for a second mortgage, lenders will look for the following:
- Significant equity in the first mortgage
- Low debt-to-income ratio
- High credit score
- Solid employment history.
Second mortgages are more than home-improvement loans - ReporterNews.com
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