Is a Second Mortgage a Good Idea?

To many home buyers the idea of taking out two mortgages on the same house sounds frightening. However, a second mortgage—also known as a second trust junior lien—makes good sense in the right circumstances and can actually save you money.

A second mortgage is simply a loan secured against your property as collateral. The term “second” indicates that the loan does not have priority on your home in case you default. Should that happen, your first mortgage has priority and that loan would be paid off before any funds go towards the second mortgage.

As a result, second mortgages come with higher interest rates than first mortgages. Second loans require fees and closing costs, just like first mortgages. You may also be required to pay points (one point is equal to one percent of the loan value) which could make the loan less attractive. You’ll need a good credit score and documentation for enough income to make the payments.

Three popular ways buyers and homeowners save money with second mortgages:

Avoiding private mortgage insurance. Buyers lacking a large down payment can use a second mortgage to qualify for their first mortgage without having to pay expensive private mortgage insurance.

Staying within GSE loan limits. With prices rising in the nation’s more expensive markets, buyers can buy a home that exceeds the limits for a loan to be bought by Fannie Mae, Freddie Mac or Ginnie Mae without incurring the higher interest rates of a jumbo loan. That translates into a significantly lower rate of interest on the primary loan.

Consolidating high interest consumer debt. Some homeowners pay off high interest short term debt like credit cards with lower interest, long term debt through a second mortgage.

Additionally, taxpayers in higher tax brackets get to deduct the interest they pay on both mortgages on their federal and state returns.


However, second mortgages have their risks:

• By taking out a second mortgage, you are adding to your overall debt burden. Anytime you add on to your overall debt burden, you make yourself more vulnerable in case you then experience financial difficulties that affect your ability to repay your debts.
• If you cannot repay, you could potentially lose your home because you are using the equity in your home as collateral.
• If you are consolidating debt, it’s not wise to substitute short term debt for long term debt if you end up paying more over the life of the second mortgage.

 source: totalmortgage.com

Do You Really Need Owners’ Title Insurance?

Many home buyers are surprised to learn that the title insurance they are required to buy during the closing process doesn’t protect them if there’s a problem with their title. Even though the home buyer pays for the policy, it only protects the lender.

So it’s no surprise that after they have saved for their down payments and put a deposit in escrow, the last thing most buyers probably want to do is spend even more money on title insurance than they had planned.

Before making a decision, however, it’s a good idea to learn more about the risks involved should you have a challenge to your title.

What does a title challenge look like?
Title searches can uncover problems that consumers never see. Examples include forgeries in the chain of title, a claim by a previously undisclosed relative of a former owner, or a mistake in the records. Searches reveal liens that have not be cleared, disputed easements and rights-of-way, life estates, conveyance of air and subsurface rights, and future interests that the home seller may not even have known about.

Unknown to the lender or buyer, title companies find and fix problems with titles in 25 percent of their searches. However they are not perfect, which is why lenders insist on coverage.

Even when a property is resold quickly, or refinanced within a short period of time from the original purchase or most recent refinance, a new title search and title policy are needed because the owner could have taken actions that had an impact on his claim to the title, such as taking out a second mortgage or incurred a lien from unpaid taxes.

Is coverage worth it?
If there’s a problem with your title and you don’t have coverage, you could easily lose your home. It happens infrequently, but often enough to make the small cost of owners’ coverage worth it to many home buyers.

According to the American Land Title Association, in 2014 a Missouri family purchased a home for more than $400,000. The title search missed a lien on the property. When the lien was discovered, the title insurer paid off the lender, but since the family wasn’t covered, they lost their home.

In another recent case, a homebuilder sold and financed a home to a first-time buyer, but because the builder financed the sale and didn’t require title insurance, neither the lender nor the homeowner had title insurance. When there was a lien on the property, the family lost the home and the builder went under.

The bottom line?

Whether or not you get owners’ title insurance is your choice, but it can cost much less than lender’s insurance. When you select a title insurer for the lender’s policy, ask for the “simultaneous issue rate.” Usually title companies will write you an owners’ rate at the same time they prepare the lenders rate but tor considerably less. You can save as much as 50 percent of the cost of the second policy, if you shop around.

source: totalmortgage.com

The silent struggle of senior citizens with debt

(The writer is a Reuters contributor. The opinions expressed are his own.)

NEW YORK - When Wanda Simpson reached retirement a couple of years ago, the Cleveland mom had an unwelcome companion: Around $25,000 in debt.

Despite a longtime job as a municipal administrator, Simpson wrestled with a combination of a second mortgage and credit-card bills that she racked up thanks to health problems and a generous tendency to help out family members.

"I was very worried, and there were a lot of sleepless nights," remembers Simpson, 68. "I didn't want to be a burden on my children, or pass away and leave a lot of debt behind."

New data reveal that Wanda Simpson has company - and plenty of it.

Indeed, the percentage of older Americans carrying debt has increased markedly in the past couple of decades. Among families headed by those 55 or older, 65.4 percent are still carrying debt loads, according to the Washington, D.C.-based Employee Benefit Research Institute (EBRI). That is up more than 10 percentage points from 1992, when only 53.8 percent of such families grappled with debt.

"It's a two-fold story of higher prevalence of debt, and an uptick in those with a very high level of debt," says Craig Copeland, EBRI's senior research associate. "Some people are in real trouble."

To wit, 9.2 percent of families headed by older Americans are forking over at least 40 percent of their income to debt payments. That, too, is up, from 8.5 percent three years earlier.

The only bright spot in the data? The average debt balance of families headed by those over 55 has actually decreased since 2010, according to EBRI, from $80,564 to $73,211 in 2013.

Still sound high? It is especially so for those heading into reduced earning years, or retiring completely.

The primary culprit, according to Copeland: rising home prices and the longer-term mortgages that result, often leaving seniors with a monthly nut well into their golden years.

Seniors are even dealing with lingering student debt: 706,000 senior households grappled with a record $18.2 billion in student loans in 2013, according to the U.S. Government Accountability Office.

It's not an easy subject to discuss, since older Americans may be ashamed that they are still dealing with debt after so many years in the workforce. They do not want to feel like a burden on their kids or grandkids, and so keep their financial struggles to themselves.

But financial experts stress that not all debt is automatically bad. A reasonable mortgage locked in at current low rates, in a home where you plan to stay for a long period, can be a very intelligent inflation hedge.

"I always suggest clients consolidate it in the form of good debt, like a mortgage on your primary residence," says Stephen Doucette, a planner with Proctor Financial in Sherborn, Massachusetts. "You are borrowing against an appreciating asset, you don't have to worry about inflation increasing the payment, and the interest is deductible.

As long as this debt is a small portion of your net worth, it is okay to play a little arbitrage, especially considering stock market risk, where a sudden decline could leave older investors very vulnerable.

"A retiree who has debt and a retirement account with equity exposure may not have the staying power he or she thinks. The debt is a fixed amount; the retirement account is variable," says David Haraway, a planner with LPL Financial in Colorado Springs, Colorado.

It is important not to halt 401(k) contributions, or drain all other sources of funds, just because you desire to be totally debt-free. Planner Scot Hansen of Shoreview, Minnesota has witnessed clients do this, and ironically their good intentions end up damaging years of careful planning.

"But this distribution only created more income to be reported, and more taxes to be paid. Plus it depleted their retirement funding source." he says.

Instead, take a measured approach. That's what Wanda Simpson did, slowly chipping away at her debt with the help of the firm Consolidated Credit, while living off her Social Security and pension checks.

The result: She just sent off her final payment.

source: www.abs-cbnnews.com

Second Mortgages

When you hear the term “second mortgage,” a negative connotation may come to mind. You may be thinking, “Why would I need a second mortgage?” I’m not in financial distress.

Well, times have changed, and gone are the days when homeowners put down large down payments and pay off their mortgages in a matter of years. Nowadays, it’s quite common to hold a second mortgage, typically in the form of a home equity line as part of a combo loan.

Types of Second Mortgages

Many homeowners carry both a first and second mortgage, often closed concurrently during the home purchase transaction. In these cases, the second mortgage is referred to as a “piggyback loan” because it sits behind the first mortgage. Piggyback loans are used to extend financing terms, allowing borrowers to put down less on a home, or break up their loan into two separate amounts to produce a more favorable blended rate.

[See the latest mortgage rates from dozens of lenders, updated daily.]

 

Two common formulas for a piggyback loan would be an 80/10/10 or an 80/20. An 80/10/10 translates to 80% on the first mortgage, 10% on the second mortgage, and a 10% down payment. An 80/20 is an 80% first mortgage, a 20% second mortgage, and zero down payment.  Uh oh.

Second mortgages can also be opened after a first mortgage transaction is closed, as a source for additional funds. Homeowners can either elect to take a lump sum of cash in the form of a home equity loan, or opt for a home equity line of credit (HELOC), which allows them to draw specific amounts of money when needed using an associated credit card. Keep in mind that you need equity in your home to execute this type of transaction.

Second Mortgage Payments

Monthly payments on second mortgages are typically pretty low relative to the first mortgage, but only because the loan amount is generally much lower.  Rates on second mortgages can be quite steep, so be sure to do the math to ensure it’s the right choice.

Second mortgages are offered in both adjustable and fixed-rate options, with home equity loans typically fixed and home equity lines of credit variable.  Home equity lines of credit also come with an interest-only option during the draw period, as do some home equity loans early on.  In any case, you should have several options to choose from to find the right fit for your particular situation.

Advantages of Second Mortgages

Second mortgages that are closed concurrently with the first mortgage during a purchase transaction are also referred to as “purchase money second mortgages”. As mentioned earlier, these second mortgages allow homeowners to come in with a smaller down payment, or no down payment at all. During a purchase transaction, the homeowner can break up the total loan amount into two separate loans called a combo loan. The risk is split between the two loans, allowing higher combined loan-to-values and lower blended interest rates.

Second mortgages in the form of piggyback loans also allow homeowners to avoid paying PMI, or private mortgage insurance. The savings can be quite substantial depending on how the loan breaks down, often saving the homeowner hundreds of dollars a month. If the first loan is kept at or below 80% loan-to-value, PMI needn’t be paid.

Additionally, breaking up your total loan amount between a first and second mortgage may allow you to keep your first mortgage under the conforming loan limit, which should help you obtain a lower interest rate if you’re in jumbo loan territory.

Second mortgages can also be opened after the purchase transaction is complete, as a home equity loan or home equity line of credit. This additional allowance of funds can provide a homeowner with much needed cash to improve the quality of their home or pay off high-interest loans, while avoiding a refinance of the existing first mortgage.

Disadvantages of Second Mortgages

Once you’ve got a second mortgage, it will be increasingly difficult to get any additional financing, such as a third mortgage. While it’s probably not common that a homeowner should require a third mortgage, emergencies do happen, and you may mind yourself trapped if you need more funds for any other reason.

Interest rates on second mortgages are typically quite high compared to first mortgages, and it’s quite common to receive an interest rate in the double-digits on a second mortgage. You could get a better deal with just one mortgage, or possibly even by paying mortgage insurance.

Many second mortgages are home equity lines of credit, which are tied to the prime rate. Whenever the prime rate is adjusted, the interest rate on your home equity line will change accordingly, effectively making it an adjustable-rate mortgage. When the Fed was raising the prime rate month after month in years past, many homeowners faced substantially higher monthly payments on their second mortgages.

Some home equity lines come with additional fees, such as an early closure fee, as well as minimum draw amounts that may exceed your personal needs. Make sure you read all the fine print to avoid any surprises.

Last but not least, second mortgages mean more debt, more interest due, and can potentially extend the amount of time it takes to pay off your first mortgage.

All that said, there are a number of pros and cons to opening a second mortgage, but they shouldn’t be looked upon as negative financing instruments, rather just another option to consider when seeking home loan financing.

One final note: Many mortgage lenders are reducing the availability of second mortgage programs as the secondary market continues to grapple with credit issues, so you may find it much more difficult to obtain a second mortgage these days.

source: thetruthaboutmortgage.com