Second Mortgage: Know what you should know
What is changed with Second Mortgages?
Second mortgages used to be a great tool for home buyers who did not have a great deal of cash to put down on a home. It was known as the 80/20 or 80/15/5, in which 80 percent of the purchase was a first mortgage and 20 percent was the second. Or with the latter 80 percent was the first mortgage, 15 percent was the second and the borrower came up with 5 percent.
Unfortunately it also meant that the home owner had no equity and the bank was at a higher risk. As home values declined over the past two years, most banks stopped offering second mortgages.
Declining home values took away the second mortgage.
A few years ago banks had no problem with second mortgages in the form of loans to homeowners in excess of 100 to 110% of a homes given value. Second mortgages were considered a good use of a banks deposits. At the time, home values were rising and banks looked at their loans as an investment vehicles. The 110% loan would eventually fall back down to a 90% over time. This of course went away when the home values started dropping, and now the 110% loan jumped up to 150% Loan to value. The banks investments had gone terribly wrong. Today banks keep this mind and now have gone to the other extreme of never lending over 90%, hoping that the markets do not fall any further.
Who offers second mortgages?
For many people simply finding a bank that offers a second mortgage can be challenging. Many of the financial institutions that included second mortgages as art of their package two years ago, just do not offer them anymore. However usually banks that do the initial first mortgage will include a second if the borrower qualifies.
Benefits of a Second Mortgage
The main benefits to a second mortgage is that it allows potential borrowers who qualify to increase their borrowing power past the standard 80 percent without having to put mortgage insurance on the loan. Mortgage insurance is used to protect the bank when they sell the loan in case of a default.
Generally when a borrower defaults on a loan the bank can sell the home as an asset for less then the value, making the sale process go quickly, and cover the original note, and subsequent investor. With higher loan amounts the quicker sale is not readily available, thus the bank will include mortgage insurance that covers an short comings.