The new mortgage rules on federally regulated banks (80% lending on refinance, $1,000,000 cap on residential, tighter self employed qualifications and fewer cash back options) has created an environment for more creative mortgage solutions.
And in some cases this can result in a second mortgage from a non federally regulated institutional lender or from a private lender.
The hole that people are attempting to fill is the financing over 80% on some type of refinance.
With the 2012 mortgage rules now in place since July, the maximum of 80% financing down from 85% may not seem like a lot, but it can can make the difference between making the numbers work and filling up your credit cards.
There still are some institutional lenders, particularly some credit unions, that are prepared to consider second mortgage financing up to 85%, providing that added bit of capital for those that qualify.
The same is true on the private mortgage lending side where some privates may even go higher than 85% depending on the real estate involved and the strength of the borrower. That being said, privates that go above 85% loan to value are in the minority of the private lending market place and higher loan to value amounts also tend to lend to higher interest rates.
But compared to being short on the cash required and having to push money into credit cards, most private money interest rate options could still be better than your readily available short term credit like credit cards provide. And even if you were to go with a credit cards to fill the cash amount required, you’re still using up the available credit you have to work with which can cause other problems including reducing your credit score.
Short term financing vehicles like credit cards also typically require 3% of the principal balance repaid every month were most private second mortgages are interest only.
Obviously the objective with any type of mortgage lending is to minimize the cost of capital as much as possible. So while some form of institutional second is always going to be preferred, a private mortgage option may end up being significantly less than any other alternative such as credit cards.
If you are looking at a private second option, make sure you are also looking ahead to how that second will be repaid in a year’s time.
Having a plan in place to repay this type of bridge loan us going to help insure that your finances will stay in order and that you won’t have to continue on with the private money option longer than you need to.
To find out more about second mortgage options available to you, give me a call at your earliest convenience and we can go through your situation in detail.
Second mortgage financing options represents a loan registered against real estate directly behind a first mortgage.
A second mortgage can be arranged on virtually any type of real estate property including land zoned as residential, commercial, and industrial.
There are basically three different potential 2nd mortgage options to consider…bank or institutional second mortgage, home equity line of credit, and private second mortgage.
Depending on your financial profile and credit profile, you may or may not be eligible for all three.
A second mortgage issued by a bank is going to be similar in structure to a first mortgage in that it will have an interest rate term and an amortization period for repayment. Rates for an institutional second are going to be similar to a first, but likely slightly higher due to second place mortgage security. That being said, the rates quoted will likely be better from the first mortgage holder than a competitor due to the fact that they already control the first mortgage position.
A very popular second mortgage financing option is a home equity line of credit, or HELOC.
With this type of facility, the approved amount of the line is registered in second position against the property, but the amount advanced will be at the control and discretion of the borrower.
Interest is charged only on principal outstanding with minimal monthly principle repayment required by most lenders on amounts outstanding.
The third type of second mortgage loan is from a private mortgage lender.
A private second is typically for a period of one year but can also be for a longer period of time, depending on the individual lender.
Private 2nd mortgages also tend to be interest only payments with the full amount of the advanced principal due and payable at the end of the interest term.
A private second mortgage is very common in situations where the borrower has some level of distressed credit or cash flow where it would not make sense to mortgage refinance the first mortgage and risk getting a higher interest rate based on a weaker borrowing profile, or apply for a bank second.
This is also the most popular form of private lending due to the fact that the rate of return is higher for private investors as mortgages registered in second position carry a higher risk of loss which translates into a higher interest rate charged.
Second mortgages can be used for just about any number of purposes including but not limited to debt consolidation, renovation, child eduction, family trip, estate planning, an so on.
Selecting a second mortgage financing option is about aligning your near and long term financing requirements with the features of each type of 2nd mortgage and each unique lender program in order to arrive at the best fit.
One of the best ways to determine this is to work with an experienced mortgage broker who can go through your requirements with you as well as work through all the different options that are potentially available to you so you can make a well informed decision.
When additional mortgage financing is required for debt consolidation or other refinancing purposes, the mortgage holder has a few basic choices. They can refinance the existing first mortgage into a new mortgage or they can obtain an additional mortgage registered behind the first mortgage in place.
The two main criteria to consider when looking to refinance an existing mortgage or secure a second mortgage are 1) total net interest cost and financing costs, and 2) repayment requirements.
If for example, the prepayment penalty is going to be significant for refinancing a mortgage with a fixed interest term, the net interest cost may very well be lower by applying for a second mortgage with either a fixed or variable rate.
Second mortgages typically are offered with fixed interest terms. For a variable rate, the second mortgage tends to come in the form of a home equity line of credit secured by a second position mortgage registration.
If a borrower can qualify for either a low fixed rate second mortgage term or an equity line of credit, the decision of one of the other is going to depend on the borrower’s view of future interest rates and their plan to repay principal over time. With a line of credit, the full mortgage balance can be paid back at any time. Fixed terms can have prepayment privileges, but there will be restrictions in place.
For individuals with weaker credit, private second mortgages are typically secured to again produce the lowest net interest cost for both mortgages combined. While the interest cost of the private second mortgage could be 12% or higher, if the amount of the mortgage is small in comparison to the existing first mortgage, the weighted average cost is still likely going to be lower than trying to refinance the first mortgage with weaker credit.
The key with private second mortgages is that they tend to come with one or two year interest terms, so there needs to be a plan in place or being worked towards to payout or refinance this debt at the end of the interest term.
Because there are several variations and strategies to utilize a second mortgage financing option, its best to work with a mortgage broker to make sure that 1) a second mortgage is the right choice for securing incremental mortgage financing, and 2) the type of second mortgage program selected is the best fit for your requirements.
The first and perhaps the most common scenario is when the borrower’s credit and/or repayment ability does not allow him or her to qualify for additional financing via an institutional mortgage. Private mortgage lenders do not have the same credit requirements as traditional lenders, allowing them to consider a broader range of credit profiles.
The second scenario is when a borrower with good credit is seeking higher leverage than what an institutional lender is prepared to provide. For second mortgage financing from a traditional bank, the loan to value requirements, depending on the property, application, and lender policies, can range from 60% to 75%.
Again, depending on the property, some private lenders may go as high as 85% of the value of the property for a private second mortgage, providing greater leverage in the process.
The third scenario is where a borrower requires a bridge loan to take advantage of some opportunity or complete an existing transaction where there isn’t much time to work with. In these cases, the additional cost of private mortgage financing is likely far less than the opportunity cost related to not being able to close a transaction on time or at all.
The fourth most common scenario is for construction financing where the primary motivation for using a private second lies in higher leverage and more predictable draw advances. The private mortgage is typically registered behind the first mortgage that was utilized to acquire the property where construction is taking place.
One of the features of a private second mortgage is the speed in which it can typically be put into place. If the property value can be quickly established and the credit profile of the individual is solid, financing can be put in place in a matter of days versus weeks for an institutional second mortgage.
While private second mortgages will come with higher rates than institutional mortgages, they also can be put in place a lot faster, have much simpler credit requirements, and less conditions written into the mortgage commitment.
If you are trying to locate and secure a private second mortgage, I suggest you give me a call and I will quickly outline what options may be available to you.
Because of the higher risk associated with a second mortgage position, lenders will add a risk related premium into the interest rate.
As a result, second mortgage rates can be anywhere from 2% to 4% higher for a similar type of first mortgage calculated on the property.
However, the actual posted rate can vary considerably depending on the interest term you’re considering and the type of mortgage product.
As an example, lets say that a homeowner has two mortgages in place. The first mortgage is from a traditional bank lender and has a five year term and effective interest rate of 5%. The second mortgage is from a private lender, has one year interest term set at a rate of 14%. Because the first mortgage is from an institutional lender and the second from a private, there will be a greater range between the interest rates.
On an apples to apples basis where you’re comparing an institutional first mortgage to an institutional second, or a private first to a private second, the rate spread between the first and second mortgages will be in the 2% to 4% range most of the time.
Its also not uncommon to see a home owner with an institutional first mortgage and a private second. Institutional seconds can be harder to secure due to the higher perceived risk which causes borrowers to locate and secure private seconds which are once again at still higher rates than an institutional second mortgage.
The one exception where registered 2nd mortgages can actually be less than a comparable first mortgage is on home lines of credit.
Typically, a home line of credit is registered as a second mortgage with a floating interest rate pegged at between prime and prime plus 2 percent. In many cases, depending on the level of the prime lending rate at any given point of time, the line of credit rate can be lower than the interest rate of the first mortgage. Situations where this can occur typically have the first mortgage with a long term interest rate higher than the prime or floating rate due to the fact that the interest rate is fixed for a period of time.
If you require information regarding second mortgage rates, I would suggest that you give me a call and I will make sure you get all your questions answered.
And many times they will do so without considering whether or not a 2nd mortgage is actually the best course of action for their specific situation.
This is where the services of a mortgage broker can be truly invaluable and should be drawn upon in these types of situations.
Here are some things to consider before signing up for an additional mortgage.
First, a second mortgage can come in the form of a set amount of funds advanced for a defined purposes and paid back over a series of years (similar to a traditional mortgage) or it can come in the form of a line of credit registered in second position against your property for an approved amount and available to you as required.
If you are looking for additional funds that you expect to pay back in less than a year, then a home line of credit is likely going to be more cost effective in the long run versus a fixed term mortgage.
Second, when additional funds are being sought, the borrower should always consider the net costs of refinancing the first mortgage versus taking out an additional second mortgage. This is more about math than anything else, and if refinancing the first is going to be cheaper overall, then its something that should be seriously considered.
In cases where repayment penalties would cause refinancing the first mortgage to be impractical, then a 2nd mortgage may be the best option available.
When going through the comparative exercise between refinancing the first mortgage and adding a second mortgage remember that the ongoing costs of the 2nd mortgage can be significantly higher. So the analysis process need to consider not only the costs incurred at mortgage closing for either option, but also the go forward costs over a similar period of time to provide an accurate comparison.
This again is where a mortgage broker can provide you with a great deal of assistance first locating the programs that best suit you situation and then working through the different scenarios and comparison with you to determine your best course of action.
If you’re considering a second mortgage, I would recommend that you give me a call so that we can go through your options together and make sure you’re getting a mortgage solution that best fits your needs and situation.