You own a home and find yourself in a situation where you need money and don’t want to tap your savings or investments. The first thing that pops into your mind is getting a second mortgage. And right fully so. Having a second mortgage in many situations is a quick and easy way to get cash.
You don’t want to refinance your first mortgage as when you took it out it had a better interest rate than whats available. Then there are all the closing costs with refinancing the first mortgage which would eat into the money you want to borrow.
A second mortgage it is. But which type should you get?
Fixed Rate Second Mortgage – As the name implies the interest rate is fixed. Terms vary from company to company but you should be able to find 10, 15, and 20 year fixed rate loans.
When I was a mortgage banker we had a 30/15 fixed rate second mortgage. How it worked was your payment was based on a 30 year schedule and at the end of 15 years you had to pay the remaining balance in full or refinance.
This is a very straight forward loan. You borrow exactly what you want at closing and pay it back just like your first mortgage.
Home Equity Line Of Credit – Kind of like a credit card against your house. Borrow when you need money or leave it with a zero balance. Monthly payments are based on a 30 year schedule with the first 10 years being interest only.
Interest rates with HELOCs are adjustable and tied into the prime rate. When the Federal Reserve raises or lower the prime rate your interest only payment will adjust with it.
Some banks charge an annual fee ($50 – $100) to have a HELOC.
I have spoken of the benefits of having a HELOC before and recommend this one over the fixed rate second mortgage.
What makes a second mortgage enticing over a new first mortgage is closing costs are a lot less. Usually costs are less than $500 including the appraisal versus $3000 with a first mortgage. In some cases the bank or mortgage company you are working with will assume the costs as long as you do not pay it off or close it in the first 3 years.
When choosing between the fixed rate mortgage and a HELOC you will notice interest rates are typically a little higher than first mortgage rates. Interest rates for both second mortgages start at whatever the prime rate is at.
From there it will depend on the Loan To Value (LTV) and amount. The lower the LTV and higher the amount will receive the best interest rates for a second mortgage.
Stated differently, if you have a lot of equity in your home (like 50%) and can take an amount over $100k without going over 80% LTV than you will get the best rate possible. Occasionally the bank will give you better than the Prime Rate.
During the refi boom and housing bubble there were mortgage companies doing second mortgages up to 125% of the value of the house. We could go up to 100% if they had good credit. When people started foreclosing after the refi boom the mortgage company who held your second mortgage or HELOC lost out big time when the house was sold at auction.
Reason being is they were in second lien position. The way the rules work is the mortgage company in first lien position gets paid first and then the second mortgage company.
In many cases the company in second lien position received nothing as homes were being sold for way less than what was owed.
Some mortgage companies stopped doing second mortgages and HELOCs all together. Banks seem to be the only ones doing them and its rare to find one that will go over 80% LTV. If another housing bubble happens they want to make sure they get paid.
If you need cash fast and have some equity in your home than a second mortgage is a no brainer. Use the equity to consolidate your credit card debt, do those home improvements, or for a down payment on an investment property. Than start paying it off when you don’t need to borrow anymore.
I would recommend a HELOC over a fixed rate second mortgage because of the flexibility. Borrow when you need the money or leave it with a $0 balance. You’ll have piece of mind knowing its there when you need money in a pinch.
Closing costs are next to nothing and interest rates are reasonable seeing how you get to write the interest off on your income taxes.
Hopefully you’ll be able to find a second mortgage as many mortgage companies and banks no longer do them.