Why are second mortgage rates higher? - Mortgage rates are all based on risk. The lower of a risk the loan is the lower the rate will be. Second mortgages are riskier loans. In the unfortunate event of a forclosure the second mortgage holder gets paid second, not first. If theres not enough money to payoff the second mortgage often they take a loss. Since they are higher risk loans to investors the carry higher rates of return (so investors will purchase them).A mortgage is considered a lien on your property. A first mortgage is in the first lien position and is the least amount of risk because they are the first to get paid should the borrower default and the home be sold through sheriff's auction or through some other type of sale. A second mortgage is in the second lien position and is at a considerably higher risk than the first so a 2nd mortgage usually has more strict lending guidelines and credit requirements and will also charge a higher interest rate to make up the difference of this greater risk. If you also had a third lien on your property, they would have the greatest risk and even much worse terms than the first and 2nd liens.
If a homeowner files for BK the second mortgage is not guaranteed to be paid off. So the lender who makes a loan in the form of a second mortgage vs a first mortgage assumes a higher risk. The lender offsets that risk by charging a higher rate.
Most second mortgages are also held in the lenders own loan portfolio rather than being sold to FannieMae, etc. Given that, there is considerable variation in rates, terms, qualification criteria, etc. from lender to lender.
When you take out a 100% one loan you will pay for private mortgage insurance (PMI). When a loan is sold on the secondary market to Fannie Mae or Freddie Mac they will only insure 80% of the value of the home. This insurance covers the other 20% of your loan in the event that you dont' pay and the property goes to foreclosure.
Second mortgages, when used on an 80/20 combo loan program are self insured and for this reason carry a higher rate. Meaning you don't have to carry PMI.
Rates on second mortgages will always be higher because the risk to the lender is higher. The rates will vary as with a first mortgage, depending on your credit worthiness, ability to pay and combined loan to value ratio. Combined loan to value ratio is the combination of the first and second mortgage compared to the sale value of your home. The lower the ratio is, the better rate you will get.
Second Mortgages - A mortgage that has a second position to the first mortgage. Also known as subordinate financing.
Second mortgages are a bigger risk to a lender as opposed to first mortgages. A first mortgage is in the first lien position which means it has priority over any other mortgages and/or liens. A Second mortgage is in the second lien position which means that the first mortgage has priority over it. For example if a consumer was to default on his home loan and the home was foreclosed upon and sold via sheriff's sale, the first mortgage would be paid out of the proceeds of the sale first and if there was anything left over then the second mortgage would be paid with the remainder. Therefore, you can see the second mortgage lender has more risk involved when they provide this loan for you. This is the main reason as to why second mortgage rates are almost always considerably higher than first mortgage rates.
A second mortgage can be a one time loan or a line of credit.
Second mortgages are often used to eliminate PMI requirements on conventional loans. This benefits the borrower because often there payments are lower than with PMI. They also benefit because intereset on mortgages are tax deductible while PMI is not.
Obtaining a second mortgage can benefit you when purchasing a home if you do not have the required 20% down to avoid mortgage insurance.
Some second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in one year. If you have a fixed rate second mortgage, the interest rate is set for the life of the loan. However, many companies offer variable rate second mortgages, also known as adjustable rate mortgages or ARMs.
Many second loans are 30/15 loans. This means that the loan is amortized over 30 years, but there is a balloon payment after 15 years. Most people wont have the loan for the full 15 years, but if you did you would have to pay the loan in full at that time.
Should I refinance my second mortgage? - Many consumers are becoming worried about the rising interest rates on their second mortgages and want to know if they should refinance to consolidate their first and second mortgage into one.
One factor a borrower can use to guage if they should refinance or not is a blended rate calculation. The blended rate is the weighted average rate for your first and second mortgage at any given time. If you can lower your blended rate by refinancing your first and second mortgage into a single loan, you may want to refinance.
The tricky part is if you decide to wait, how long should you wait. If you refinanced recently and have a low fixed rate first mortgage, you may have to choose between a higher fixed rate or keeping your second mortgage that continues to increase in rate.
As the balance on your first and second mortgage change, so will your blended rate. The best way to calculate your current blended rate is to use the following example:
First mortgage balance multiplied by first mortgage rate plus the second mortgage balance multiplied by the second mortgage rate and divide that number by your total balance of both loans.
There are calculators available on the Internet that can quickly calculate your blended rate if you plug in these basic numbers. Of you can contact me and I can help you calculate your blended rate and decide if refinancing is right for you.
Second mortgages are often tied to the prime rate. The prime rate has been adjusting upward the last several years. Consolidating your second mortgage with your first is often worthwhile even if rates have gone up and your first mortgage is at a very attractive rate compared to what is currently being offered.
If the balance on the second mortgage is relatively small and will be paid off soon, you may not want to refinance the two mortgages into one single loan. There will be costs associated with refinancing. If the second mortgage will be paid off within the next year, your exposure to the increasing rate environment is limited. In this case, the security offered by a fixed rate refinance may not justify the closing costs.
If your second mortgage is a home equity line, it is tied the the prime rate which has been rising rather quickly. If you have a low rate first mortgage and do not want to refinance it to consolidate your two loans, consider replacing your equity line with a fixed-rate second. Rates are lower and are fixed for the life of the loan which can be up to thirty years. Ask your mortgage consultant about these.
All other things being equal, sometimes homeowners just want to have one mortgage payment to make every month.
Another factor to consider is that you loose the flexibility, and security that a Home Equity Line of Credit provides. Many borrowers keep an open line of credit even if it has no balance as a rainy day fund. In the event you need money quick or need a large amount of money a home equity line can provide that if there is available funds on the line. By refinancing you may lower your payments but you may also loose that security.
Alternately if there is available equity in your home you may be able to refinance that secont mortgage and add another line of credit that has a zero balance. This allows you to lower your current payment while maintaining the security of available funds
How do you figure out what your blended interest rate is? For example, if you currently have an 80/20 loan, with interest rates of 6.625% and 9.875% respectively; You take the first rate of 6.625 times 80% and come up with 5.3%. You then take your second loan, I.E. 9.875% and multiply it by 20% and arrive at 1.975%. Add the two together and you have your blended rate, 7.275%. If you can refinance with a single loan for a lower interest rate, it may be a good idea.
An experienced mortgage planner will be able to help you evaluate refinancing a second mortgage. Important things he should ask you would include:
1) when does your draw period end (for lines of credit)? At the end of the draw period, your loan will convert to a fixed rate second mortgage and you lose the flexibility of being able to draw against the equity for emergencies.
2) how does the margin on the new loan compare to the margin on the old loan? If your home has benefitted from significant appreciation, your total loan to value may be low enough to get a lower margin which will help offset the higher indexes of todays market.
3) How are you utilizing your second mortgage? Paying off your higher rate credit card balances to get out from under the interest or floating a small business are common considerations FOR a second mortgage, but should not become routine.
There are other factors to take into consideration to such as how long you intend to own the property. If you are going to sell soon then you might want to stick it out. The only way to truly know is to look at all factors and plug this information into a financial calculator or mortgage calculators. If you are inexperienced in finances then consult you mortgage borker and ask him to run some calculations for you.
A large part of the decision on if to refinance your second mortgage will be based on your first mortgage. If you have a low rate first mortgage you may not want to refinace them together. Instead you may choose to replace your current second mortgage with a home equity line.
