First of all, What is a second mortgage? A second mortgage is a loan on your home, just like your primary mortgage, but usually for a smaller amount and with a higher interest rate. In the late 90’s and early 2000’s second mortgages were extremely popular as people would get a primary mortgage for 80% of the home value and then a second loan to cover the down payment of %20 essentially buying a home for no money down.
While that practice has all but diminished, there are still 80/15/5 loans where you finance 80% of the home amount, then a second loan for 15% of the home amount at a higher interest, and then put 5% down. Or an 80/10/10. I opted for an 80/15/5 on my last home and it worked out well. The interest on a home loan is tax deductible after all, so the 13% or whatever it was on the second mortgage didn’t bother us too much. I’ll go into why you may want to do this.
The Three Reasons
1. Avoid the PMI So what the heck is PMI. PMI stands for Private Mortgage Insurance. Many institutions will require that you carry PMI on a loan where 20% has not been used for down payment. Basically, PMI is for the banks protection. And if you don’t have 20% to put down on the house, it means a lighter wallet for you as you pay the insurance monthly until you have paid your loan down to 80% of the principle. By getting the second mortgage and using it as a part or all of your down payment, this eliminates the need to pay the PMI monthly.
2. Better Cash Flow So let’s say you are buying a house. It is your first time out. You have scrimped and saved every penny you have to put into a 20% down payment. You have $20,000 in the bank and you are ready to go. So at 20%down, you can afford a $100,000 home. Depending on where you are in the world, That may get an OK house, Or in a lot of cases it’s going to get you a fixer-upper. If you were to dump your entire $20,000 into the house, what are you going to use to fix it up, or just make it your own? Home improvement is expensive. The first house my wife and I bought, we ended up spending $5000 just in paint and supplies the first week. Did we have to? No. but it made the house feel more like a home to us and that is important.
3. Avoid a Jumbo Mortgage In the United States, A Jumbo loan ,as defined by the Housing and economic recovery act of 2008, is any home mortgage exceeding $729,750 or 125% of the median home value within the metropolitan statistical area, whichever is a smaller amount With House prices on the rise, getting into a nice place could mean a Jumbo Loan. I have seen very small Fix up houses on TV going for $800k in California. Because the amounts are so great, Banks will place a higher interest rate on the loan to compensate for the greater risk. By breaking it into 2 loans, you avoid the higher interest rates and keep more money in your pockets.
2nd Mortgages are more difficult to obtain nowadays, but don’t rule them out. If you think you could benefit in one of the three ways above. Make sure to inquire with your loan officer or broker. They will steer you in the right direction.
