Second mortgages became highly popular in the 2000s, when listing yearly increases in house values provided homeowners with a seemingly nonstop source of home equity. Many homeowners utilized second mortgages such as home equity loans and lines of credit (HELOCs) to take out and use this equity. Lenders used another type of second mortgage, a piggyback loan, as a means of acquiring 100 percent financing for a high number of buyers.
Definition
A second mortgage is any mortgage lien that exists on a home beyond the initial first mortgage. Second mortgages are instant as they’re subordinate to the first, or main, mortgage. The main mortgage is the first note paid if a house is refinanced, sold, moved or foreclosed on. In solid housing markets with a lot of appreciation, this isn’t a huge risk for a creditor in second position to take because he’s sure to receive his cash back. In a depreciating marketplace, there might not be enough cash left over out of a mortgage or sale after satisfying the primary loan to pay the next note off, so the next creditor must take a loss.
Features
Since homeowners are a lot more inclined to foreclose on a home they have little if any equity in, secondary mortgages are a higher risk even in markets that are enjoying. Because of the additional risk, credit standards and interest rates for second mortgages are somewhat higher than they are for main mortgages. Lenders want to make sure a borrower doesn’t have a history of getting in over his head with debt. They also need the higher return on their investment by extra interest rates to absorb any potential losses. Defaulting on another mortgage may lead to foreclosure, so paying the primary mortgage time whilst missing payments on another will not save a borrower from foreclosure.
Home Equity Loan
A home equity loan is to get a lump sum amount with monthly payments for a specified term, much like a primary mortgage, usually with fixed speed though a few are adjustable rate loans. Borrowers may receive the cash for a cash payment or use it to pay debts. Home equity loans are due in full, whatever the value of the home.
HELOCs
HELOCs are lines of credit opened against the equity in a home. Borrowers may borrow up to the maximum approved amount in many trades and may pay cash back, increasing the amount of available credit exactly like a credit card. HELOCs are usually adjustable rate loans also remain open as lines of credit to get a specified period. After that period is over, anywhere from five to 20 decades, the line shuts and the balance owed transfers into a conventional loan with monthly repayments.
Piggyback Loans
Piggyback loans are loans that pay some or all of the difference between a main loan of 80 percent of a home value and the purchase price. The point of the loan is to prevent the mortgage insurance premium attached to the majority of loans of over 80 percent of the purchase price. These premiums can be as much as several hundred dollars a month and are not tax deductible, therefore the higher interest rate of a piggyback second may represent a savings to the borrower. These loans come in fixed, adjustable and interest only formats. External secondary creditors Provide piggyback seconds, but a few principal lenders will piggyback their particular principal loans