Purchase Money Second Mortgage
What is a Purchase Money Second?
When buying a $300,000 home, the first lien position loan generally has the larger loan amount. As an example, the first lien would be $240,000 or 80% LTV. The second is in a less superior position on title, you might have $30,000 or 10% LTV. The first and second-lien positions now add up to 90% LTV, which means you need to make up the difference of the remaining $30,000 or 10% LTV. Meaning by not borrowing over 80% LTV for your first, you avoid PMI.
How Does it Work?
If you were to ever default on the property, the first lien position holds the superior position on title. This means if the bank were to sell your property, the first lien position would have the ability to recoup their losses. The second-lien position would have to wait to see if the sale of the property will have enough excess funds to satisfy the first lien position in order for it to be paid. This second position inherits risk, they may not recoup any money if the property went into default. There are certain items that could leapfrog all lien positions, including the first, such as past due taxes.
The Rule of Thumb
There are several options, but two of the most common are purchase money seconds, and standard second loans. What is the difference? Purchase money seconds comes from the seller. However, the lending institution finances the standard seconds.
For a standard second, if you secure funding from the same lender as your first loan, there’s very little you must do. After you apply for the loan, the lender has most of everything else they need. They’ll process your application using the same income, asset, and credit information you provided for the first loan.
At the closing, you’ll close on two loans rather than one. This just means signing two sets of closing documents and agreeing to take two liens on your home rather than one. If you sell the home, you must pay off both loans in order to release the liens on your property and transfer homeownership.
What are the Terms?
Like your first, the purchase money second has varying terms depending on the lender. Lenders may offer various terms, but usually they are shorter than the first loan. Seconds often offer a secure fixed interest rate and most don’t have a prepayment penalty so you’re free to pay off the loan whenever you want.
Utilizing a second might free up your cash initially, but keep in mind that second generally hold a higher note rate. Make sure to set a plan to either consolidate the loan or pay it off by making extra payments throughout its term. Penalties or fees associated with your loan may occur, make sure to be prudent and do your due diligence.