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Other Ways To Finance Multiple Mortgages
Aside from tapping into conventional loans, there are other ways that you can finance multiple mortgages, including the following:
Hard money loans. These do not come from traditional lenders but from private funding from companies and individuals. Usually, lenders look for properties that have a good selling potential and dont stay in the market that long. Compared to the low rates that you usually find with conventional loans, hard money loans usually come with higher interest rates, between 8-15%. Since hard money loans require larger down payments, you might need considerable cash handy.
Blanket loans. With blanket loans, you can finance multiple properties with the same mortgage agreement. Blanket loans usually work best for commercial property owners, real estate investors, and developers. These types of loans allow for a less expensive and more efficient buying process. Another important feature is that when one property under the agreement gets sold or refinanced, there is a clause that releases the home from the original mortgage.
Portfolio loans. Rather than selling them on the secondary mortgage market, lenders originate and keep portfolio loans, meaning they stay in the lenders portfolio. That also means a lender sets the underwriting standards for borrowers. Because lenders cannot sell the loanand therefore take on the whole risk of the portfolio loanthese types of loans can end up becoming more costly than an equivalent conforming loan.
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Risks Of A Second Mortgage
You must consider the possible risks before you take out a second home loan. It increases your debt obligation, and you must analyse your financial situation to ensure you can make the additional repayments. Lenders may also charge higher fees on second home loans because the risks are higher for them also. Lenders are conservative in allowing second mortgages as it increases the risk of default. Financial institutions also offer a lower loan-to-value ratio ranging between 60 per cent and 80 per cent of the property value. Managing two loans, especially if obtained from different lenders, may be complicated and cumbersome.
Several lenders have stringent second home loan requirements as theyre wary of approving a second mortgage due to the higher risks. Also, approval from your existing lender is required, and your lender may charge some fees to assess your request for approval.
You can find out whether a second mortgage is a suitable financial option for you by speaking with a qualified and experienced financial professional.
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Jodie Humphries
Personal Finance Editor
Cons Of Getting A Second Mortgage
Second mortgages come with their own set of challenges. Here are four cons of getting a second mortgage for your home:
- Second mortgages usually have higher interest rates than refinancing: Because second mortgages take the second lien position in a foreclosure, lenders are taking a lot of risk in giving you a loan for the second place in your line of mortgages. So to compensate for that, they may demand higher interest rates than the first mortgage or a refinance.
- Second mortgages are financial disturbances: Especially if youre already struggling with the first mortgage, adding another mortgage can put lots of pressure on your finance, bite deep into your budget and possibly lead to defaulting in your primary mortgage or both.
- Second mortgages can take you back: Especially if youre close to paying off your current mortgage, a second mortgage might pull you right back into the debt track and put your home at stake if you default on your monthly payment.
- Second mortgages can be money traps: Because of the freedom of use of the loans from second mortgages, it is possible for you to spend it on projects that put you in more debt.
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Types Of Second Mortgages
- A second mortgage that sits behind a first mortgage
- Taken out at the same time
- Extends financing and reduces down payment requirement
- A common example is an 80/10/10 or 80/20
As mentioned, some homeowners carry both a first and second mortgage, often closed concurrently during a home purchase transaction.
In these cases, the 2nd mortgage is referred to as a piggyback loan because it is taken out at the same time and sits behind the first mortgage.
Piggyback mortgage loans are used to extend financing, allowing borrowers to put down less on a home, or break up their loan balance into two separate amounts to produce a more favorable blended rate.
Two common formulas for a piggyback loan are an 80/10/10 loan or an 80/20 loan, the latter especially helpful if you have little in your bank account.
An 80/10/10 mortgage translates to an 80% loan-to-value ratio on the first mortgage, 10% LTV on the second mortgage, and a 10% down payment.
In essence, youre putting down just 10%, but keeping your first mortgage at the important 80% LTV or less threshold to avoid mortgage insurance.
You may also get a more competitive interest rate if your first mortgage is at 80% LTV or lower.
For example, if the purchase price were $100,000, youd get a first mortgage for $80,000, a second mortgage for $10,000, and bring $10,000 to the table in down payment money.
This was a simple, yet risky way to get a mortgage with no skin in the game a decade or so ago.
Private Lenders May Have Looser Qualifying Guidelines
If you and your mortgage professional decide to go the route of a private lender for your second mortgage, then you may be subject to less stringent conditions than at a traditional bank. Private lenders are exactly that, private, so they are not bogged down by regulations and internal bank policies, and are therefore much more flexible. This is great for the consumer!
That being said, most private lenders are looking at a mix of items, and so the more you can help make your case why you are a good risk, the better the pricing and overall the more you will be able to borrow in the alternative mortgage market.
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Dont Let Multiple Lenders Lead To Multiple Application Fees
When you apply for a mortgage, working with two or more lenders at once can help you find the best deal.
However, what you dont want is to end up paying multiple fees for multiple applications.
For example, if you get far enough into the process of a mortgage application, you will need to pay for an appraisal.
While having one appraisal is necessary, paying for multiple appraisals isnt the best use of your money.
Instead, find one lender with whom you feel confident. Vet them by the things that are most important to you.
For some homeowners, its all about the closing costs and the interest rate. For others, closing costs and interest rates may be important, but paying a $100/day penalty to the builder because your lender couldnt close on time can end up being much costlier than an additional 0.125% on the interest rate.
In other words, service and being able to close on time, can prove to be just as important if not more than a slightly higher interest rate.
Know whats important to you so that you can shop and compare accordingly.
How Two People Can Buy A House
The concept of buying a home with someone else is relatively simple to understand. Co-buying essentially means you are a co-borrower on the mortgage loan.
In terms of the home buying process, very little changes. You will both apply for the loan together and each of you will go through the same financial checks a single or married home buyer would.
There are four key things to keep in mind when buying a home with someone else:
- Each co-borrower is a primary applicant on the loan application
- Both parties sign the deed to the home and are listed on the title
- Both people are legally responsible for mortgage payments
- Each co-borrower shares in the propertys equity that appreciates over time.
When you have two co-borrowers, both are listed on the mortgage loan as joint tenants or occupants. This means that both parties intend to live in the home as their primary residence and have equal ownership rights to the property. It also obligates both parties to pay the mortgage back, says Gelios.
Its important to know that each co-borrower will have an equal percentage of interest in the property and make any decisions relating to its use without necessarily having to consult with the other owner, adds Chebil.
Theyll also be responsible for paying their proportional share of expenses associated with maintaining and repairing the home as well as property taxes and homeowners insurance associated with the property, he continues.
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What Is A Piggyback Mortgage
A piggyback mortgage is when you take out two separate loans for the same home. Typically, the first mortgage is set at 80% of the homes value and the second loan is for 10%. The remaining 10% comes out of your pocket as the down payment. This is also called an 80-10-10 loan, although its also possible for lenders to agree to an 80-5-15 loan or an 80-15-5 mortgage. In either case, the first and second digits always correspond to the primary and secondary loan amounts.
Multiple Mortgages Multiple Properties
When you have multiple mortgages on multiple properties, it is important not only to have enough equity in each property but also to have enough income to support the payments on each. While income is an important factor in all mortgages, multiple properties carry multiple expenses. Not only do you have to keep current on your payments, but you also have taxes and insurance on each property. Most banks want to see that your debt-to-income ratio is no more than 40 percent. This means that all of your debt, including the payments on multiple mortgages, must account for no more than 40 percent of your income.
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What Is A Home Equity Loan
A home equity loan is cash equivalent to the portion of your home equity you want to mortgage. The loan is given to you as a lump of cash to spend for whatever you want.
For example, after getting 50% equity on a $100,000 property, you can get a home equity loan for 60% of your equity. This will be equal to $30,000 given to you in cash.
The home equity loan becomes a second-position loan. And alongside your first-position loan, you have to make monthly payments for a specific period of time to pay off the principal and an added interest.
How To Apply For A Second Mortgage
The application process for a second mortgage is similar to that of your first mortgage, with a few key differences. For instance, youll have to provide details of your existing loan in addition to your personal and financial details. If youre taking out a second mortgage on a commercial property, you may also have to provide some business details as well. Specific eligibility requirements will differ between lenders, so be sure to compare your options and find a loan that youll be eligible for.
While second mortgages can be beneficial in some circumstances, they do come with some inherent risks. Make sure youre aware of all the traps and pitfalls before you decide whether a second home loan is right for you.
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Pros Of Getting A Second Mortgage
Here are four pros of getting a second mortgage on your home.
- Second mortgages often have better interest rates than credit cards: Second mortgage interest rates are usually less than credit card rates. So getting a second mortgage to pay your credit card debts can help build your credit score as well as provide you with a less demanding loan.
- You can use loans from second mortgages for anything: Unlike school loans, business loans or car loans, theres no restriction to what you can use the loans from a second mortgage for. Compared to your first mortgage and other forms of restricted loans, this is a lot of freedom.
- You can access high loans with second mortgages: You can access high loan amounts at good rates with a second mortgage. For example, based on your lender and how well you meet other lending requirements, you can use as much as 90% of your home equity for your second mortgage.
- Getting a second mortgage help you make better use of your home equity: Instead of tying down money in your property, you can use the equity youve gathered over the years in your home to access loans that you can use for paying off credit card debts, other loans or funding your personal projects.
You May Get Flooded With Solicitations From Mortgage Companies
Mortgage brokers, lenders, and online fintech platforms may sell your personal information to other financial institutions, which can result in an overwhelming amount of unsolicited phone calls and emails after submitting a single loan application.
While there is not much borrowers can do once they agree to a lenders terms and conditions, limiting the number of inquiries may also limit the amount of subsequent spam.
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Can You Have Multiple Home Equity Loans Outstanding At One Time
See Mortgage Rate Quotes for Your Home
Yes, its possible to have multiple home equity loans at the same time if you own equity in your home to qualify. Whether youre getting another home equity loan on the same property or multiple home equity loans on different properties, its important to understand that your financial profile, your homes appraised value and your home equity stake will be the major factors in determining your eligibility for additional financing.
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Contact Multiple Lenders Now
Consumers typically dont think twice about shopping around for cars, or even basic household items. Dont be afraid to apply this same logic when it comes to shopping for a mortgage loan.
Applying for more than one mortgage at once allows you to compare costs, rates, program options and even testdrive lenders prior to committing to just one lender.
At the link below, get connected with multiple loan experts and start the shopping process today.
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Should I Tell My Lender Im Applying With More Than One Company
It doesnt hurt to tell lenders that you are shopping around. In fact, you should tell them. Multiple applications shown to increase competition between lenders.
Mortgage competition is alive and well in our current economy. If you have a good credit history, lenders may be more likely to compete for your business.
Informing lenders that youre shopping and comparing will typically result in the lender being more inclined to put their best foot forward from the very beginning.
Plus, in the era of online mortgage brokers, prequalification, and preapproval borrowers today have more tools than ever before to get the best rate, without having to necessarily submit a formal mortgage application.
Can You Have 2 Mortgages On 2 Different Properties
The chances of both houses getting mortgages arent impossible, although they must all qualify based on income and debt. All loan requests should be accompanied by a solid endorsement that you will be able to afford them. In addition to the timing of the two mortgage applications, the lender will factor in the two approvals separately.
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How Much A Homebuyer Can Save With Multiple Mortgage Quotes
The savings from getting quotes from different lenders will vary depending on a borrowers financial situation, including credit history, type of mortgage, loan amount, and down payment.
However, the same Freddie Mac study expects the average saving from only one additional mortgage quote to be approximately $1,435.
That figure soars to $2,914 when homebuyers solicit five rate quotes.
These savings are confirmed by a CFPB study that found, failing to comparison shop for a mortgage costs the average homebuyer approximately $300 per year and many thousands of dollars over the life of the loan.
The savings may differ from one borrower to the next, but the findings are clear: Buyers can get a lower interest rate on their home loan by working with multiple lenders.
