Second Mortgages and “Low Down” Mortgages

SunTrust Bank, one of the lenders we work with, is joining the ranks of other lenders who are eliminating or shelving their second mortgage products, including their combos where they have the first and second mortgage (such as an 80/10/10).  Where we once had several options for second mortgages and HELOCs, we are down to just a few.

Another bank that is still offering second mortgages (fixed and HELOCs) are limiting the total loan to value to 80% if your mid-credit score is 680-699.  A 700 credit score will allow you to go up to 85% total loan to value.

We do have another option for second mortgages that will go to a higher loan to value with lower credit scores…you pay the price with rates up to 3 points higher than what the other bank offers (with the lower loan to value).

What are your alternatives if you do not have 20 or 15% down? 

  • Seller financing for a second mortgage (private deed of trust subject to approval with underwriting).
  • Private mortgage insurance.  Upfront, monthly or lender paid.
  • FHA insured mortgages (subject to loan limits which will be changing soon)
  • VA insured mortgages

If you are currently preapproved to purchase a home and you are using an 80/10/10 or 80/15/5, I urge you to contact your Mortgage Professional to confirm your preapproval is still valid and to develop a "Plan B" for your home purchase strategy.   Some private mortgage insurance companies are also pulling back on higher loan to value mortgages (this includes lpmi and Fannie Flex); if you’re using less than 10% down with a pmi scenario–check with your Mortgage Professional for "Plan B" as well.

Home Equity Loans Offer Protection from Financial Uncertainty

While on vacation last week, I took advantage of being "unplugged" and read the Seattle Times.   On the last Sunday of 2007, they featured an article on How You Can Ride Out a Recession by Teresa Dixon Murray.   Teresa offers 17 easy suggestions on how to protect yourself during uncertain economic times with her top tip being:

1. If you own a house, get a home-equity line today.

It won’t cost you money unless you use the credit line. But this way, you will have access to money if you lose your job or hit an emergency. If you wait until you’ve been laid off to apply for the credit line, "good luck trying to get a loan if you’re unemployed," said Les Szarka, president of Szarka Financial Management in North Olmsted, Ohio.

I’m sometimes hesitant to broadly recommend HELOCs to clients.  Actually, I feel this way about all mortgage programs, selecting a mortgage properly requires evaluating your current needs and future financial goals.   HELOCs can be trouble when used improperly and a valuable tool when used with the right strategy (this is true for any mortgage). 

One of the best reasons to have a home equity line of credit is for protection in the event of unexpected circumstances such as loss of employment or health.  And as the article mentions, to provide a safety net during uncertain times with our economy.  A HELOC is best used when you’re not using them (was that a Yogi-ism?) but you must obtain one while you’re employed, with good credit and home equity.   If you lose your job or are temporarily off work due to health issues and/or your miss a payment due to being off work or ill, you will find it difficult to qualify for a home equity loan when you need it the most.   Imagine being in need of cash, having decent equity in your home and having a lender tell you, "sorry you don’t qualify" or having to opt for a hard money loan. 

There are a couple other reasons to consider a home equity loan today instead of tomorrow or next week:

Guidelines are tightening.   Most home equity loans are limiting the loan to value they will lend on and are raising credit score requirements.    Combine this with possibility of properties losing value and the amount of your possible credit line may be limited.

For example, if you home is valued at $400,000 today and you have a $300,000 mortgage currently against the property, your credit line may be limited to $60,000.  If your home depreciates 5% to $380,000; your available credit line may be limited to $42,000.   During these historic times, it’s also possible for the lender to reduce your credit line on the HELOC or to close it due to inactivity.

Review your options with your trusted Mortgage Professional (who will hopefully refer you to a bank or credit union if their rates are not competitive with this product…some are…some are not).

Home Equity Loans

Today I received an email from one of my clients regarding home equity loans, also known as a HELOC.  Here’s part of their question:

"We keep getting info regarding a home equity loan. We want to know what a home equity loan is and if that is something for us?"

Home equity loans can be an excellent financial tool when used properly.   They can also be dangerous if not managed correctly.   Typically, home equity loans feature interest only payment which are on the balance used on the loan.   The rate is based on current prime and has a lifetime cap of 18%.  A home equity loan will adjust whenever the prime rate adjust (unless the rate has been fixed).  They operate very similar to a credit card. 

The rate may vary based on loan to value (equity), credit score, the level of documentation (full doc or low doc) and occupancy (owner vs. rental).    The rate is prime plus or minus what ever factor is determined based on the above criteria (margin).  For example, it could be prime plus 0, or prime plus 1, prime minus 1, etc.   Prime is currently 8.25%.   There is a draw period and when that time is up (typically 10 or 15 years) the balance at that time is due in full.

Situations where home equity loans are best used are when you’re not using them.  For example, if you have a home equity loan attached to your home and you do not intend on using it.   It’s there in case of an emergency, such as loss of employment or medical need.   They are also great if you’re anticipating having cash to pay it down (and you’re not planning on investing the cash or using it elsewhere) since your mortgage payment is based on the balance.  We used a home equity loan for the purchase of our current home.  We are paying it off in chunks and intend to keep it open even once it is paid.   Home equity loans creates liquidity and provides flexibility with you equity and cash flow.  I prefer the home equity loans where  you have the option of fixing your rate (however, if you’re in a market where the rates are going down, you may not want to fix it).

When home owners use home equity loans like a maxed out credit card and tap out significant amounts of their equity and it’s a pattern to pay off debt; a  home equity loan can be a recipe for trouble.   A home equity loan, with the wrong plan or with borrowers who cannot resist relying on it, can quickly gobble up your equity.

Fixed rate second mortgages are other possible mortgage options to the home equity loan.  The advantage to the fixed rate is that…the rate is fixed.  And, you know what your payment will be month to month.   However, if you are planning on making a lump mortgage payment, unless the lender is willing to re-amortize the mortgage, you’re stuck with your existing mortgage payment.

A refinance of your first mortgage may also be worth considering depending how long you plan on retaining the mortgage and what your blended rate would be with having two mortgages.

When the prime rate was lower, HELOCs were very popular.  And, once prime began to climb, many borrowers refinanced out after realizing what their rates were climbing too and how quickly it can happen.

With so many options available, this is why it’s important to work with a professional Mortgage Planner who will consider your options and financial goals.