Description: Second mortgages, also commonly called junior liens, are personal loans secured against the first mortgage on a property. Depending on when the second lien is originated, the loan may be structured either as a second mortgage or piggy back second mortgage. In either case, a borrower receives funds from the sale of a property and assumes the responsibility of paying off the first mortgage, along with any applicable taxes. Sometimes, however, these second mortgages may include a balloon payment at the end of the term. This payment is used for the immediate needs associated with the second loan, such as down payment for the property or repairs.
Balloon payment: When there is an initial payment made on second mortgages, often the balloon amount for that payment is not paid out all at once. Instead, it is a set amount that is paid out gradually over time. If the payment on the first mortgage is not enough to cover all of the necessary costs, then additional funds may need to be borrowed from the borrower to make up the difference. To do this, a second mortgage insurance policy is often sold to cover the borrower’s monthly costs.
Private mortgage insurance: Most private lenders have a limited practice of selling private mortgage insurance. It is important that you discuss your specific needs with your lender before you sign a contract. Private mortgage insurance policies are often more expensive than traditional mortgages. It is possible that they will be able to save you money in the long run if you should have a claim. It is also possible that these policies are underwritten by lenders who do not have a good track record.
Lenders: Only mortgage lenders are able to sell a mortgage to a buyer. They can also sell the existing first mortgage and refer the proceeds to a new mortgage for the buyer. However, when mortgage lenders sell a mortgage, they retain all rights to it. Some lenders will allow the buyer to take possession of the property immediately while others will require a waiting period.
Who can qualify: Mortgage loans are available to anyone regardless of credit or income. All homeowners should be able to qualify for a 2nd mortgage, but others factors will affect the amount. A homeowner with a low credit score, or one who has filed bankruptcy will generally be denied a loan. In addition, some lenders will only consider borrowers who have owned their home for at least two years. Any homeowner who has owned their home for less than two years is considered a good candidate for a loan.
Amount: As mentioned above, some private lenders will only consider borrowers who have owned their home for less than two years. If you fall into this category, you may be able to receive a lower interest rate on your next loan. In fact, your first mortgage may offer the lowest rate. Lenders are not concerned with your credit score or financial history when determining the amount that you can borrow. This means that you could borrow as much as twice the amount that you owed on your first mortgage.
Private lenders are not the only ones that will offer a piggyback loan to a homeowner. The federal government also offers loans to qualified buyers through the FHA. In most cases, you can receive a loan that is up to 80% cheaper than the market value of your home. If you owe money on your first mortgage, you can use a second mortgage for any home purchase transaction; you just have to convince a lender that you can repay the money.
Homeowners may be able to refinance their existing loan through private lenders or the FHA. They may also be able to take advantage of equity loans and home equity lines of credit from other investors. These are just two options available for potential homeowners to consolidate their debt and raise their equity at the same time. A home buyer can also raise the equity in his or her home by purchasing another property.