Chapter 9

SECOND MORTGAGES  

Second mortgages are frequently misunderstood.  Quite often they follow  a first or primary mortgage.  Second mortgages can also be referred to as a ‘junior lien’ or a  ‘piggyback second’ when used for the purpose of purchasing real property securing the loan.  Several types of second mortgages are:  fixed rate/term, interest only, home equity lines, and bridge loans.  Their purposes vary as well as their rates, terms, and functionality. Mortgage fact:   these loans are in second lien position secured by real estate which creates  a greater risk factor  to the lender.  Acceptable collateral for second mortgages may be:   owner-occupied residential property (primary or secondary-second homes), single family homes, condominium, townhouses or duplexes.  These loans may also be secured by mobile homes which are fixed to  a permanent foundation and also used for one to four unit family, residential ownership properties.    Typically, the second mortgages have a higher interest rate as compared to first mortgages.   The current market trend amongst lenders is to eliminate second mortgage availability due to their high risk and recent mortgage foreclosures/bankruptcy as well as anticipated future similar financial credit issues.  Heavy losses of second mortgages by some major national lenders have mortgage lenders taking another look at alternatives such as first mortgages with private mortgage insurance.  Second mortgages when used in conjunction with first mortgages may provide a lower, combined monthly payment as opposed for first mortgages with private mortgage insurance aka PMI.  From an investors’ standpoint, first mortgages with PMI are becoming a more desirable form of financing.   The following is a list of second mortgages along with some basic functions:  

• The fixed rate/term is the most commonly used second mortgage.  This fixed option is not intended to meet revolving credit needs.  The rate is fixed throughout the term of the loan.  The term is generally fifteen (15) years, but thirty (30) year terms may also be available.   

• Interest only second mortgages are also available.  The advantage of this type of loan provides for a  lower monthly payment which is a minimum monthly payment of the interest due on the principle balance of the loan.  The disadvantage to this type of financing is clean:  the average consumer does not  necessarily understand this type of financing and fails to pay any additional payment toward principal. 

• Home equity lines are used for a variety of consumer needs such as:  student education, home improvements, debt consolidation etc.   Credit lines generally have a minimum loan amount i.e. $5,000 and the maximum limit will vary by lender.  The line functions similar to that of a credit card which most consumers can relate – payment and interest is due when a balance exists.  Most credit lines are available for ten (10) years at which time they are re-evaluated for credit worthiness and acceptability. 

• Bridge Loans are ideally a financial link to purchase a new residence while awaiting the sale of an existing residence.  It allows a borrower the opportunity to make a purchase for their new home so as not to miss a financial opportunity for a new residence.  Bridge loans are seldom used as they are usually an expensive solution to purchasing real estate. Mortgage loan officers should review this type of solution carefully as the borrower(s) must quality for existing, future, and the bridge loan itself; a financial luxury that is neither affordable nor desirable for the average consumer.  The bridge loan may be secured by the current or future residence.  The ideal outcome is to pay off the bridge loan and current mortgage on the current residence when settlement occurs.

Due to both risks and complexities of second mortgages (liens), lender criteria, fees,  and availability will vary from lender-to-lender.  The repayment period/term for a second mortgage may be a little as six (6) months.  Some second mortgages may be ‘modified’ to a lesser or greater loan amount.  Processing of second mortgages may take as little as a day or as much as several weeks depending on the lenders procedures.  Interest paid on second mortgages may be tax deductible.  Ultimately, the decision by a mortgage loan officer to approve the use of a second mortgage should include the needs of the borrower in conjunction with both ethical and best lending practices.  Funding of second mortgages may be delayed for three (3) days when used after ownership has occurred. 

“Do Better Business…. The Carroll Way!”  

The information provided in this manual reflects current mortgage information which may be subject to change 
without  notice/or which may have already been eliminated. Your transaction may involve updates periodically.  
Consult with your mortgage loan officer for updated information.

March 16, 2009