1. A second mortgage could be called a number of different names. Some of their names of them are fixed rate second mortgage, closed end second mortgage, home equity line of credit (HELOC), stand alone second mortgage, 30/15 second mortgage, soft second mortgage, and balloon second mortgage. All of these loans would be considered a mortgage that is behind the first mortgage that you have against the property.
2. First mortgage rates are determined by a couple different things but the main factor is the 10 Year Treasury Bond. This is a moving index that changes every day on the stock market. In the current mortgage mess that is going on right now in the year of 2008 rates are going to be factored with more than just the 10 Year T-Bond. Banks and investment firms are putting another factor into their equations and it is called risk.
3. Risk is what the banks are doing when they give you money to buy or refinance your home. In many cases the banks are giving you hundreds of thousands of dollars. In return the banks want you to just make your payments back to them with interest. Over the span of 30 years they can collect a lot of interest and in most cases the average home owner will pay what they bought their home for in interest.
4. Second mortgage rates are determined from the prime rate. This is what The Federal Reserve lends money to banks with. The prime rate moves when the Federal Reserve gets together and decides to raise or lower them based on current economic conditions. They are pretty much wrong all the time but that is another story. The prime rate was as low as 1% in 2002. What this means is that you could get a second mortgage or HELOC with a interest rate of about 3%. Most banks would take what they borrow the money for and add 2% on top of that number. That number would represent their profit margin. Actually during that time period and as of the past 6 months interest rates for the time being are lower than a 30 year fixed rate mortgage.
5. Typically interest rates on a second mortgage are going to be higher than the first mortgage because of that risk factor again. Mortgage companies determine the rates they are going to give you for a second mortgage based on a couple different factors. Those factors are the prime rate, your loan to value (LTV), credit score, and debt to income ratio (DTI).
6. The biggest factors are the prime rate, loan to value, andyour credit score. When mortgage companies were doing second mortgages and HELOC’s all the time (not so much anymore) they would look at your mortgage application and go through their rate sheets with all of its adjustments. Typically for evey 5% loan to value you went up your interest rate would get .50% added onto it. As an example let’s say your loan to value was 90% and the par rate for that day was 7% at 80% LTV. This means you would get hit with two rate adjustments of .50% and the interest rate you would be offered would be an adjustable 8% (if it was a HELOC its adjustable). As you can see if you went up to 100% LTV you would now be paying 9%. The loan to value would be the first adjustment, the next would be your credit score. At one time you could get a second mortgage with a credit score as low as 620 but the majority of lenders needed to see a 660 and up. To get a 2nd mortgage at a 660-680 credit score you would only be able to do a loan up to 90% LTV. A 680-720 credit score would let you do a loan up to 95% LTV anda score over 720 you could have done a second mortgage up to 100% LTV. Having a credit score between 660-680 would have a 1% interest rate adjustment, 680-720 will have .5% rate adjustment and a score over 720 would not be any additional costs. What this means for example is lets say you have a credit score of of 672 you could only get a second mortgage up to 90% LTV. The interest rate offered to you would be 7% (prime rate at the time) + 1% (rate adjustment for LTV) + 1% (for the credit score) = 9%.
7. The mortgage company can offer you a lower interest rate but you would have to buy down the interest rate or what’s commonly called buying down the rate. Depending on the mortgage banker they already know that you are so mortgage rate focused that you would not care if you were charged another $800 in costs. The mortgage broker can move the numbers around any which way you want as long as they cover the costs that are covered on their rate sheet.
8. Going back to that risk factor thing again. This is the newest one to enter the second mortgage market. What happens in the case of a foreclosure is whatever bank holds the first lien position on the house would get paid first at short sale or a auction. It is not uncommon to see two different banks holding mortgage notes for two different loans. This can make for quite the predicament because neither want to lose out. What happens the majority of the time is the bank that holds the second mortgage is going to get shafted and will probably take a big loss in the principal amount that was lent. Both banks have to agree to the terms of the sale and some will not let the other bank sell until the loss the one is taking is not as bad as the others.
9. Many banks have stopped doing second mortgages or home equity lines of credit all together because of all of the homes going into foreclosure. Since the banks do not want to get shafted when it comes to trying to get paid at a foreclosure they have to charge higher interest rates. The ones that are still doing them have tightened up their guidelines all together and it is really hard to get one. Depending on the bank you are working with be prepared to pay interest rates 2%-4% higher than the going prime rate even if you have perfect credit and a low loan to value. It’s just the nature of the beast.
10. With this new risk factor going on in the mortgage industry these are pretty much going to be standard practices from now on. The United States financial industry is in shambles and the only way the banks are going to be able to raise working capital faster is by raising interest rates to cover all fo their losses in the real estate, credit, and mortgage arenas.