What is a 2nd Mortgage and When do I use one?
What is a 2nd Mortgage?
Often referred to as “piggyback” loans, 2nd mortgages work in combination with a 1st mortgage to solve a variety of financial situations. Your 1st mortgage is typically a Conventional, Jumbo, VA, or FHA Loan. On the other hand, 2nd mortgages are either a Closed-End Second Mortgage (CES), Bridge Loan, or Home Equity Line of Credit (HELOC). While 2nd mortgages can be taken out as a lien on your current home to fund things like renovations or debt consolidation, this article focuses on the use of a 2nd mortgage to purchase a new home.
How can a Home Equity Line of Credit help me buy a home?
You may already be familiar with the concept of a HELOC. As mentioned above, they are often used for things like home renovations. So how does a HELOC help you at the closing table? In short, 2nd mortgages allow you to borrow a higher percentage of your new home’s value. The more you can borrow, the less you need to put down. That means you can avoid taking out a Jumbo Loan, skip on the private mortgage insurance, or simply keep more money in the bank.
Jumbo House without the Jumbo Loan
Consider this: the 2021 loan limit for a 5% Down Jumbo is $650,000*. Now, let’s say you are looking at an $800,000 home. That means you will have to take out a Jumbo Loan and put at least 10% down… Until now.
The maximum Combined LTV on a second mortgage is 95%. That means you can borrow up to 95% of the value of your new home (otherwise stated as needing a minimum of 5% down). Now, if we can get technical for a sec. If a borrower takes out a 1st mortgage right at the conforming loan limit– thus, avoiding a Jumbo Loan- they can take out a 2nd mortgage for the difference, in order to get to a 95% LTV. The resulting cash-to-close? $40,000. Once again, for the people in the back, you can buy an $800,000 home and bring only $40,000 to the table.
If you’d like to take a closer look at the math, reach out to one of our mortgage experts.
Avoid Private Mortgage Insurance
For many, private mortgage insurance is a necessary evil. Anytime you put less than 20% down you are required to pay this PMI. Granted, PMI doesn’t cost nearly as much as it used to. But it’s one of those things some buyers just can’t bring themselves to sign on for. So, what are the options if you want to avoid PMI? Deplete the reserves in order to put 20% down? Put off the home search until you’ve saved up? Reduce the price point? … Until now.
Let’s say you are a million-dollar homebuyer. It takes a lot of cash on hand to have both the required reserves and a 20% down payment for a $1M home. Instead of coming up with all of that cash, you can take out a Jumbo first mortgage, a second mortgage for 10%, and bring only 10% to the closing table. In other words, you can buy a $1M home with 10% Down and NO PMI.
Solve for the Short Term
There’s always a certain amount of nervousness that comes with buying a home. Will the existing house sell on time? What happens if an unexpected purchase arises and all the money is tied up in the down payment? How long will it take to replenish the savings account? Depending on the risk factor, it’s questions like these that can cause the home search to come to a halt… Until now.
Much like a Bridge Loan, borrowers can take out a loan equivalent to the equity in their current home, then pay it off when the home sells. The greater advantage being that you can potentially borrow more with a second mortgage than a Bridge Loan. The point is, it’s easier than ever to make non-contingent offers.
Whew! That’s a lot of uses.
We threw a lot of information at you with lots of scenarios. But these CES, HELOC, and Bridge programs are kind of a big deal. If you think a 2nd mortgage can help your situation, please contact us today.
*Down payment requirements and corresponding loan limits do change. Talk to a mortgage banker for the most up-to-date amounts.