How Does A Silent Second Mortgage Work?
Your guide to Silent Second Mortgages.
Mortgages come in many shapes and sizes. But there is one kind of mortgage that is so nicely hidden and kept hush-hush, many people do not even know it exists.
That’s right, it’s called a silent second mortgage and it has been secretly tiptoeing around the world of lending and borrowing yet people are still unaware of its existence.
But what is a second mortgage and how does a silent second mortgage work?
Silent Second Mortgage Meaning
A silent second mortgage is a second mortgage placed on an asset like property for down payment funds. This second mortgage is not disclosed to the lender on the original first mortgage. The second mortgage is called a “silent” mortgage because its existence is not disclosed to the lender by the borrower.
Just like with a traditional mortgage, the collateral for the second mortgage is the home you are trying to buy.
Why Buy a Silent Second Mortgage?
The benefits of a silent second mortgage are quite obvious. If you think you have found the perfect home for you and your family, with a silent second mortgage, you will get to buy a home with less down payment.
Why You Should Not Buy a Silent Second Mortgage?
But even though lenders require borrowers to disclose the source of all down payment funding, they sometimes fail to detect the existence of a silent second mortgage. However, if you have a silent second mortgage that has not been disclosed to your original lender of the first mortgage, you could be prosecuted for mortgage fraud as it is illegal.
This is why it is advisable to avoid a silent second mortgage at all costs. If you feel like you have found the perfect house and the perfect lender but cannot seem to take care of that 20% of the down payment, do not succumb to getting a second mortgage and another lender to take care of that for you.
Now you might be wondering why a silent second mortgage even exists if it is illegal. Well there is another type of a silent second mortgage called down payment assistance that is completely legit.
Down-Payment Assistance (DPA)
If you have found a house that you want to buy but do not have the sufficient funds needed for a down payment, you can use any of the 2,000 down payment assistance programs being offered across the country that are also referred to as “silent second” mortgages. However, in the case of down-payment assistance, the term “silent” comes from the fact that this mortgage does not need to be paid back immediately which means the monthly bills in your household are kept manageable.
These silent second mortgages are offered in low-to-moderate income areas to stimulate sales by state nonprofit housing agencies or government institutions like Housing and Urban Development (HUD). DPAs can also be found in high-cost communities that price people out in lower income brackets.
Even though the lender providing the first mortgage will end up knowing if you choose to obtain this kind of mortgage, traditional lenders do not offer DPA loans themselves. Which is why most people are not aware of the existence of DPA loans.
How Does a Silent Second Mortgage Work?
Silent second mortgages are useful when a buyer cannot afford the down payment that is required by the first mortgage. A silent second mortgage allows the borrower to purchase a home that otherwise would not have been within their reach.
A buyer is required to provide a down payment when they decide to purchase a home. The lender will request the buyer to completely disclose all sources of where the down payment funds are coming from when the mortgage deal is being completed. This usually is where the second mortgage is detected but lenders can also miss it. If you do not report this second mortgage to the lender and continue to use it to fulfill the obligation of the down payment, fraud or illegal actions can occur which, as discussed above, can land you in serious trouble.So in situations like such, silence actually refers to a lack of disclosure and transparency.
Silent Second Mortgage Risks
If you are taking out a second mortgage for the down payment, you are required to report it to the lender since the collateral for the second mortgage will also be the home as in the first mortgage. And since lenders generally require cash for the down payment, it is factored into the overall terms of the first mortgage loan.
If you were to obtain a second mortgage, that too against the collateral, it would end up affecting the risks and loan term for the lender of the first mortgage. The second mortgage will just add on to the risk since there will be an additional form of debt which will include new interest payments. Moreover, the first mortgage lender will seek full collateral rights to a specific piece of collateral. Whereas a second mortgage would end up conflicting with the first secured collateral rights that were given to the initial mortgage lender.
Second Mortgage Interest Rates
Generally, the interest rates on a second mortgage tend to be higher than the interest rates found for first mortgages. This is because issuing a second mortgage is a bigger risk for lenders. And as a general rule of thumb in the lending and borrowing industry, the bigger the risk, the higher the interest rates. You can check how high your interest rates would be with a second mortgage loan calculator.
When you first qualify for a second mortgage, the lender will place a new lien against your property when giving you the loan. Once you have a lien in place, the lender will have the right to take the proceeds from the sale of your home in case of a foreclosure.
If you end up facing foreclosure or have to sell your home before you can pay off your mortgages, the lender from the first mortgage will have to be paid first and the second mortgage liens next. However, with this arrangement, if there is a shortage of cash, the second mortgage lender might have to suffer from the sale of the property.
However, before you take out a second mortgage, it is important to consider the pros and cons to make sure this would be a good idea for your situation.
Advantages of a Second Mortgage
- A second mortgage can help you borrow a large amount of money that you could not typically get without using your home as collateral. However, your debt levels, credit history, income and other factors play an essential role in determining how much equity you can tap.
- Interest rates for second mortgages may be higher than interest rates on first mortgages but they are generally lower than rates on personal loans or credit cards. So if you are desperate for some help with the down payment, you can use a second mortgage instead of a personal loan or a credit card. Since your home is the collateral for a second mortgage, the risk for the lender is significantly reduced. This can easily translate into savings for you as the borrower.
- If you use a second mortgage to either buy, build or substantially improve your home that has been used as collateral to secure the home, the interest can end up being tax deductible.
Disadvantages of a Second Mortgage
- There is a possible risk of foreclosure that is with any loan that has been secured by a home. If you stop making your mortgage payments or default on them due to any reason, the lender has the authority to foreclose on your home. This is why you should not spend home equity money frivolously.
- Can you refinance with a silent second mortgage? No, a second mortgage can end up being a hindrance if you are looking to refinance. A second mortgage also does not bode well with a loan modification or if you have to sell your home quickly.
- The closing costs on second mortgages can often add up to thousands of dollars, proving to be quite expensive. You should be prepared to pay title fees, origination fees, appraisal and other expenses. However, a bright side is that many of these costs are negotiable.
- There is a Federal tax law limit on the deductibility of interest on home equity loans (HELOCs). So if you want to use a second mortgage to pay off a student loan or a credit card debt, you should keep in mind that the interest is not deductible.
Once you have decided to opt for a second mortgage and are ready to move forward, the following steps can help you secure a good second mortgage loan.
Tips for Getting a Second Mortgage
When getting a second mortgage, you should make sure you have equity in the home. Lenders are not likely to extend credit against a property that does not have much owner’s equity. So in order to make yourself desirable, you should have at least 20 percent equity in your home. Which leaves no more than 80 percent of the home’s total value to make up the remaining mortgage. This number can be checked by dividing your remaining mortgage balance by the home’s value.
Moreover, before you decide to approach a lender, you should know how much you need to borrow beforehand. It is also important to know whether or not you need a one-time loan or would like the option to borrow multiple times. This will help you decide whether a second mortgage fits your needs better or a straight home equity loan (HELOC) will. If you want a chance to consolidate debt, you might want to go for a lump-sum equity loan. However, if you are planning to renovate your home spanning over a number of years, the HELOC might make more sense for you.
You should give your credit scores and reports a check before you apply for the loan or any type of financing. If you have any credit-reporting mistakes, you should fix them beforehand. If you feel like your credit score is lagging behind, you should take the necessary steps to try to improve it. Paying the credit card debt is a good place to start in order to make your credit score better.
Before you say yes to the first lender you find willing to give you a loan, you should shop around to see if you can find better rates. Start with a local bank or credit union and continue getting quotes from several lenders, including online lenders.
Next Steps
If you are looking to borrow a large sum of money or just want to secure financing that has a low interest rate, a second mortgage may be the way to go for you. However, you should try to reserve this type of financing only to pay for projects that will end up boosting your home’s value or the overall earning power and net worth.
However, if you have decided to take out a second mortgage, you should make sure you check out rates from multiple different lenders so that you have a clue about what the rates are in the market and where you can get the best ones.
Moreover, now that you are well aware of how does a silent second mortgage work<span class=”c0″>, you should examine your personal finances before deciding to take on a new debt. Since these debts are long term debts, the decision to take them out should be carefully thought out. You can take the help of a mortgage expert and real estate attorney to help you figure out if this is the best option for you.
