A second housing loan is any debenture secured by the property’s value, aside from the main mortgage used to purchase the house itself. That one is called the primary housing loan; any other debentures secured by the property are called second home loans, no matter how many properties are there. These things are one of three kinds:
- A HEL or Home Equity Loan, where people borrow a lump sum of money
- HELOC or Home Equity Lines of Credit, which individuals can draw against when needed
- Piggyback debentures are used to split purchases of homes between two different debentures as a cost-saving measure
What is a second mortgage?
Mortgages are debentures backed by real estate as collateral; these things do not have to have been used to purchase the property itself. That is why a HEL or Home Equity Loan is considered a kind of mortgage. Second, housing loans are called that because they are secondary to the primary or main debenture used for home purchases. In the case of foreclosures, primary home debentures get fully paid off before the second loan gets a dime. They are considered second liens, behind the first lien of the main debenture.
Check out this site to find out more about HELs.
Because these things are secured by equities in the borrowers’ houses, their interest rates (IR) can be a lot lower compared to those for other debenture options, such as unsecured personal loans or credit cards. Unsecured debentures such as credit cards do not have anything to back them up, so they are a lot riskier for lending firms.
This kind of debenture uses the equity in the borrower’s property as collateral, so financial institutions like conventional banks, credit unions, or lending firms will be more willing to offer lower IRs. Because these things are second liens, rates on these debentures run a lot higher compared to what lending firms charge for the first housing credit.
Because the main lien gets paid first in case of defaults, second home loans are a lot riskier for financial institutions, sot the IR is different. Rates on these kinds of loans can be either adjustable or fixed. Fixed rates do not change over the life of the debenture, so the borrower’s payments are predictable. Adjustable ones start out lower compared to comparable fixed rates.
It will periodically reset depending on the market condition, so the charges people are paying may fall or rise. Standard HELs and piggyback debentures usually have fixed rates, but Home Equity Lines of Credit is always set up as adjustable-rate debentures during the time when borrowers can draw against their line of credit.
Kinds of second home debentures
As mentioned above, these things fall into three kinds:
- Standard HELs
- Piggyback debentures
In a standard HEL, people borrow a particular amount of funds and pay it back over a prearranged time, usually five to fifteen years. These are usually set up as a fixed-rate second loan, although they are readily available as an adjustable-rate loan as well.
People can usually use the money from a HEL for any purpose they wish – they do not have to explain why they want the money, in most instances. But some HELs can only be used for property improvements and for which budgets need to be submitted.
A HELOC or Home Equity Line of Credit is a special kind of HEL that, instead of borrowing fixed sums of money, sets up lines of credit that people can draw against as they wish. It is like credit cards secured by the property’s equity. As a matter of fact, lending firms usually provide individuals with a card to use to withdraw money.
A HELOC on a second housing debenture has two periods: draw periods, when individuals can borrow against their LOC, and the repayment periods, when they need to repay the principal credit with interest. The draw is usually five to ten years; on the other hand, the repayment period is ten to twenty years.
Home Equity Lines of Credit always starts out as adjustable-rate debentures during draw periods, but can usually be converted to fixed-rate ones for repayment periods. These things offer tons of financial flexibility. People can borrow funds as they wish, which makes HELOCs pretty useful for situations where they have tons of irregular expenses sooner or later, like starting a small business or extended home improvement projects.
But individuals can also pay them as they wish during draw periods, freeing up amounts of credits again, as well as reducing interest charges. It makes HELOCs a useful cash-management tool to help borrowers smooth out irregularities in income or expenses.
Want to know more about HELOCs? Visit https://www.cnbc.com/select/what-is-a-home-equity-line-of-credit/ to find out more.
A piggyback debenture is a different category of a second home loan. Instead of borrowing against the property’s equity, this loan is in addition to the main mortgage when purchasing a house. In short, the borrower is using two loans to purchase the house.
For instance, when purchasing a three hundred thousand dollar house, people might pay for it using a two hundred forty thousand dollar primary home debenture, a thirty thousand dollar piggyback credit, and a thirty thousand dollar down payment (DP). Why do individuals do this?
There are two known reasons. The first reason is to cover all or part of the DP to avoid paying for PMIs or Private Mortgage Insurance. The second reason is to avoid taking out jumbo debentures when purchasing more expensive properties. Housing debenture insurances are required on mortgages exceeding eighty percent of the property’s value and usually go from one-half to a whole percent of the debenture amount every year.
So borrowers might take out primary mortgages for eighty percent of the property value, get piggyback loans for another ten percent, and make a ten percent DP. It is called an eighty-ten-ten debenture and is one of the most popular piggyback credits.
Another reason for this credit is to avoid taking out jumbo loans. These things are debentures that exceed the max people can borrow with financial institutions like Freddie Mac, Fannie Mae, or Federal Housing Admin conforming credit.
Depending on local property values, the limit rage from four hundred fifty thousand to six hundred eighty thousand dollars in most states in the United States and up to seven hundred twenty-two thousand dollars in Hawaii. Jumbo rates are usually significantly higher compared to conforming credits. So individuals purchasing high-value properties may take out conforming mortgages for the Federal Housing Admin, Freddie Mac, or Fannie Mae maximum and cover the rest with piggyback credits and DPs.
For HELs and LOCs, the primary requirement is property equity. People need to have a certain amount of equity built up before they can think about taking out a second home credit. As a general rule, lending firms that offer these services will allow individuals to borrow against up to eighty percent of their property value – that is, their primary and secondary loans combined.
So if the property is valued at three hundred thousand dollars and they still owe two hundred thousand dollars on their debentures, they could take out a HEL or get a LOC for up to forty thousand dollars (two hundred forty thousand dollars = 80% of three hundred thousand dollars).
That is not a fast and hard rule. If the individual has a good or excellent credit rating, some lending firms will let the individual borrow against as much as 90% or even 95% of the property value. Most financial institutions will need a minimum score of 620, usually higher. Individuals with lower credit scores will pay much higher IRs and face stricter equity requirements compared to people with good or excellent scores.
On piggyback credits, lending firms will usually require that borrowers cover at least five to ten percent of the property purchase price with their own money; that is, a five to ten percent DP. It might give them an eighty-ten-ten or eighty-fifteen-five piggyback. Before the housing bubble of 2008, financial institutions like conventional banks, credit unions, or lending firms routinely allowed eighty-twenty piggybacks with no DP at all, but these things have effectively disappeared. People should check out a forbrukslån guide to know these requirements.
Refinancing this type of loan
People can refinance this type of debenture the same as individuals can a primary house debenture. People simply take out new loans and use them to pay old ones at the same time. Refinancing is especially very common with Home Equity Lines of Credit, where borrower’s refi as their draw time is coming to an end.
It allows people to extend their draw time out another five to ten years, roll the balance owed into new HELOCs and maintain financial flexibilities of being able to repay and borrow as they wish. Individuals may also refi their primary and secondary loans at the same time to roll them into one debenture.
It usually happens when people can get a better mortgage rate compared to what they are currently paying on two separate credits. It also may happen to piggyback credits when they have accumulated enough equity that Private Mortgage Insurance is no longer required on new credits. These mortgages can also present a test when it comes to refinancing the first mortgage.
Usually, the oldest debenture is the first lien. When the first mortgage is refinanced, any second mortgage becomes the new primary lien unless it is reassigned as the new first mortgage. Financial institutions may be unwilling to do that, so individuals simply roll them into one new loan. But that may be hard to do if the property value goes down and the owner has little to no home equity to work with. In this situation, a secondary debenture can block the refi of the primary loan if the lending firm is unwilling to reassign it.