Mortgage second » Second Mortgages

Removing Second Mortgages Though Lien Stripping

admin — Mon, 18 Jan 2010 08:59:39 +0000

In the present economic times many individuals are living with financial decisions causing them to hold assets, such as houses, automobiles and boats, whose values have plummeted. Individuals are living in properties whose values have dropped far below the mortgages or driving cars, which are valued at a third of the loans. Those individuals with financial difficulties are looking for assistance through the bankruptcy courts in an attempt to get out from underneath all of the debts and liens acquired, which now vastly exceed their current assets.

There are two types of liens, which can be attached to an individual’s property or assets. The first is a voluntary lien, which is basically a situation where you have agreed to use the asset as collateral for a debt, i.e. mortgages and auto loans. A non-voluntary lien is one that a creditor imposes on you and that gives them the right to force you to sell the asset so that they can be paid, for example: judgments against you or tax liens. These liens are either secured or unsecured as to the asset they are attached to.

The most common issue for an individual nowadays is the situation where a homeowner who has a first and second mortgage on a primary residence is facing bankruptcy and wondering if they have the ability to save the family home. As real estate markets fall and the fair market values of the homes fall, homeowners are left with mortgages that far exceed the current fair market value of their homes. There is a process which could be of help to many in this situation and it is called “lien stripping”.

“Lien stripping” refers to the process of reducing a secured claim to the value of the underlying collateral. It uses the combined effect of 11 U.S.C.A. § 506(a) and 11 U.S.C.A. § 506(d) to bifurcate the lien into secured and unsecured. The secured lien is allowed in the amount up to the fair market value of the property at the time of the stripping. The balance of the lien, which exceeds the fair market value of the property, is now deemed unsecured.

Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the assets. Section 506(a) and 506(d) of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the lien is now unsecured. The most common application of lien stripping is the reduction of car loan liens to the present value of the vehicle however it is currently used more often with home mortgages in bankruptcy situations. Lien stripping with car loans has been limited to vehicles purchased over 910 days.

The Bankruptcy Code does permit a bankruptcy plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence”. Section 1322 (b)(2). This section provides protection to the holder of a claim secured only by a lien on the debtor’s principal residence by prohibiting any modification of the terms, however the issue arose as to if this section precluded “lien stripping” of undersecured residential mortgages in the face of Bankruptcy Code section 506 which appears to permit bifurcation of undersecured mortgages and voiding of unsecured portions of the mortgage lien. At least two bankruptcy court judges sitting in Massachusetts have permitted such bifurcations.

In any event, there is an exception as to the lien on a principal residence lien and that is if there is a second or third lien on the same property. In this instance those liens, lien stripping is available to render them totally unsecured if the first mortgage balance equals or exceeds the value of the personal residence. The exception is only if there are two distinct mortgages on the property, not a refinancing situation. It should also be noted that the limitation of lien stripping of first mortgages only apply to personal residences, it will be allowed for a mortgage on a building used for business or renting.

As always, all situations relative to a strategy for bankruptcy and lien stripping should be discussed in detail with a bankruptcy attorney to understand all your avenues open to you.

By: Michael A. Goldstein

State Fee Limits for Second Mortgages in California

admin — Thu, 14 Jan 2010 10:48:49 +0000

Everywhere you go, advocacy groups are urging stricter laws on non-conforming 2nd mortgages and home equity loans. Sub-prime mortgages are likely to be more costly than “A -paper” loans, but they are intended for borrowers who pose a greater risk to lenders. In most cases they are considered non-conforming because of the lack of credit or past credit problems.

California’s new laws, AB 489 and AB 344, became effective July 1, 2002. They apply to a mortgage or deed of trust with a loan balance of no more than $250,000. The protections provided by the laws are triggered if the annual percentage rate of the loan is more than eight percentage points over the yield on Treasury securities, or if the total points and fees payable by the consumer exceed six percent of the total loan amount. Thus, there is a 5.99% max in fees. (i.e., $35,000 second mortgage in CA is restricted to 5.99% of loan amount = $2,096 for APR affecting fees. Maximum APR for a 15 year 2nd mortgage in August in CA is 13.10%, and for the rest of the nation its 15.07%.

What is happening is that people in California are being rejected for 125% second mortgages and sub-prime home equity loans because the State of California thinks that they can’t make financial decisions on their own. And, some groups continue to feel the need for legislation further tightening the provisions of AB 489 which would make it even more difficult for California homeowners to use their home equity to secure loans.

If California homeowners want to consolidate credit card debt that they are paying 20% a month for, they should be able to consolidate the debt into a second mortgage. Interest rates are driven by market conditions, and credit risks determined by the lenders. CA should follow suit with the rest of the nation.

Excessive anti-predatory lending laws can hurt legitimate lenders and the consumers they serve. For example, sub-prime loans do help people with poor FICO scores by extending debt consolidation refinancing and second mortgage loans to pay off high-interest debts. Also, sub-prime loans are legitimately extended to borrowers with good credit who are self-employed or who have unpredictable incomes.

By: Maria Ny

The Facts About Second Mortgages

admin — Sun, 03 Jan 2010 03:21:05 +0000

Your home: It’s probably your biggest asset. Having a home to back you up when you need a loan is one of the greatest advantages of home ownership. In recent years, there has been a major increase in the amount of people looking to use their homes as a way to get access to extra money when they need it most. One of the best ways to do this is through a second mortgage.

A second mortgage is exactly what it says it is – a loan made in addition to your first mortgage, and it’s based on the amount of equity you have built into your home. Many people use them to fund home renovations, to pay off credit cards, or to put a child through college. Since you’ve already been through the process once, the underwriting required to get a second mortgage is much simpler than it was the first time around, and the cost of the transactions involved will be significantly lower. This usually makes up for the fact that interest rates on the second mortgage are a bit higher than they were on the first one.

On a second mortgage, you will borrow a fixed sum of money against your home equity, and pay it back over a specified amount of time. The amount you borrow will be combined with the amount you still owe on your first mortgage.

It all sounds pretty simple. There are just a few things to keep in mind. First of all, don’t take out a second mortgage on your home unless you’ve built up a fair amount of equity in the property already- that is, made payments on the original mortgage balance for a good amount of time. You may still be able to get a second mortgage if you don’t have much equity, but your rates will be so much higher, and the amount you can borrow so much lower, that it will essentially be a waste of your time and money. This is one of those things that is worth waiting for.

Also, look into the other options of borrowing against the equity of your home, including a home equity loan and a home equity line of credit. All of these options allow you to borrow against your equity, but there are slight variations among them that mean one of the three may be the best option for you. It will depend, for the most part, on your particular financial standing, the amount of money you need to borrow, and the amount of home equity you currently have.

By: Joseph Kenny

How Do Second Mortgage Loans Work?

admin — Sun, 27 Dec 2009 11:05:30 +0000

If you need extra money for home improvements, debt consolidation or even to purchase an additional home then a second mortgage might be exactly what you are looking for to make that happen. However, when you hear the term second mortgage you might not be sure exactly what it means. To put it simply it is just another mortgage on your existing home. Basically you are borrowing money for one or more reasons and using your home as collateral.

The term “second” means that the loan you are taking out does not have priority on your home if for some reason you can’t pay it back on time. In all cases the initial mortgage on your home would be paid before any money would go toward a second mortgage payment. With that being said, the next question is why in the world someone would put their home up as collateral for money. Well, the answer is that you shouldn’t unless you are in a situation where you need a large amount of money fast.

Western Vista Federal Credit Union in Wyoming notes that a “second mortgage is what it says – the second loan against a specific piece of property. Consider this example: Let’s say you have a first mortgage on your home. The value is $100,000 and you have a $60,000 balance left to pay on your loan. The $40,000 difference is considered equity, or the part of the home that you own outright. If you wish to further borrow against that $40,000, you would be taking out a second mortgage on the home in order to do so. Why borrow against this equity? In many cases, the interest rate you pay on your mortgage is lower than many other types of loans. Interest is also frequently tax deductible for a first or second mortgage, but not necessarily for a car loan or a credit card.”

When a person borrows money against their home that’s a large chunk of change being used for collateral and it also allows the borrower to get a bigger loan. There are some disadvantages to second mortgages such as the fact that you are taking a chance with your home should something happen and you have trouble paying the second mortgage back.

Take a look at the interest rate on a second mortgage too. You can probably expect the rate to be a bit higher because it is riskier to the lender who knows that if a default occurs the primary mortgage gets paid first and then the second mortgage. You can also be choosy about a second mortgage so check more than one source when trying to make a decision. Watch out too for balloon payments, which is a payment that starts out low and rises as time goes by. If possible, choose a fixed interest rate. Also be aware that second mortgages, like any other loans, have additional closing costs. There are the appraisal fees, application costs and other closing costs that can be as random as title searches.

At the Mortgage101 they say, “Many companies will charge a fee for lending you money. The fee is usually a percentage of the loan and is sometimes referred to as “points.” One point is equal to one percent of the amount you borrow. For example, if you were to borrow $10,000 with a fee of eight points, you would pay $800 in “points.” The number of point’s mortgage companies charge varies, so it may be worthwhile to shop around.”
You also want to make sure you get a second loan that allows you to keep your first mortgage.

In the long run second mortgages are a good bet for home improvement financing and some second mortgages can even be extended for up to 20 years. Remember though, it’s not only home equity lines of credit that don’t outline the amount of the monthly payments so read your contract. There are many second mortgage loans that don’t either. Joe Prussack notes, “Everybody loves low monthly payments… These popular 2nds’ (second mortgages) also usually have adjustable rates so these loans aren’t for the faint hearted.” In this case, if you are one of the fainthearted then stick with a fixed interest rate versus one of the variable interest rate loans. This way you will know exactly what payments are expected each month be it for a second mortgage or another type of loan in order to secure a big ticket item that you have needed for the past few years.

By: Rita Cook

Second Mortgages: What you Need to Know

admin — Mon, 07 Dec 2009 18:01:19 +0000

At times in life it may be necessary to come up with a sum of cash for unexpected expenses or even expenses that you might not be able to afford without a influx of cash. In these cases a second mortgage can come in quite handy. Before taking out a second mortgage; however, you should know how they work and the advantages and disadvantages of second mortgages.

Basically a second mortgage occurs when you take out another mortgage on top of the existing mortgage on your home. This type of loan is secured with the property for collateral. Of course, the first mortgage takes precedence in the event that you default on the loan. Any funds that are left would then be applied to the second mortgage.

Many people commonly use second mortgages for such expenses as home improvements, the purchase of a second or vacation home and to consolidate other debts with a lower interest rate. Of course, you may also be able to use the proceeds of your second mortgage for other options but you should always keep in mind that you are putting your home at risk for the purchase and be sure you can justify the risk for that purpose.

One of the major disadvantages of a second mortgage is that the interest rate will usually be higher than your first mortgage. Lenders insist on higher interest rates because they understand they won’t be the first in line in the event that you default on the loan and they need to protect their assets, so they do this with higher interest rates. Of course, the rates are typically lower than what you could obtain with any other type of loan and much lower than credit cards.

You should also be aware that you’ll typically be responsible for some fairly significant closing costs on second mortgages. If you can’t pay those fees, you may not be able to work out a second mortgage on your property.

Due to the amount of risk involved you need to be absolutely sure you have no other option before taking out such a loan. After all, you are risking the loss of your home, so you should be sure you’re willing to take the risk as well as be relatively sure you can cover the additional loan payments.

If you do decide a second mortgage is the right option for you, be sure to shop around for rates before taking the first one offered to you. You may be able to get better terms or a lower interest rate by shopping around.

Always look over the terms to be sure of what you’re agreeing to pay. One of the most typical arrangements with many second mortgage lenders is to tie what is known as voluntary insurance in with your mortgage. Depending on the level of your current insurance policy, you may not need this additional coverage and cost. In addition, always make sure you know how much you’re paying for closing costs, such as application fees, points to get a lower interest rate and appraisal fees.

By: Joseph Kenny

Commercial Second Mortgages – A Way to Unlock Equity

admin — Mon, 07 Dec 2009 16:04:16 +0000

Commercial second mortgages have historically been a very rare financing tool reserved for extremely strong borrowers, divided into two general segments.

1. Owner occupant property owners with outstanding business finances.

2. Large sophisticated commercial real estate developments with minimum loan amounts beginning at $5 million. Typical project size would be $15 million plus.

Both of these types of loans have been out of reach for the vast majority of commercial real estate investors and users. Owners have had no reliable or efficient way of accessing their equity without refinancing their current first position loan or taking on the “dreaded” equity partner.

A few national lenders have recently started offering fixed rate commercial second loans; much to the industries surprise. This loan structure can dramatically change the illiquidity that so many property owners complain about.

The terms of the loan program include fixed periods ranging from 5 -10 years with amortization schedules between 25 -30 years. Loan amounts are small ranging from $50,000 -$500,000 with max Combined Loan to Value of 70 – 75%, among other details. Rates are strong for borrower with excellent credit, yet increase steeply for borrowers with good to decent credit scores. As of this writing, the lowest rate would be 8.15% for a borrower with 720 + credit and a loan amount between $400,000 – $500,000.

It is interesting to witness what our clients use the Commercial Second Mortgage for. Among the more creative scenarios include:

Use Commercial 2nd Loan Proceeds as Down Payment on New Acquisition.

For example, borrower could pull equity out of an existing property and use that capital as the down payment/closing cost on a new commercial property purchase. Essentially maximizing the overall leverage of the property owner’s portfolio and limiting out of pocket cash.

The underwriting of the second loan would be off the existing property and would not negatively affect the cash flow and or Debt Coverage Ratio of the property being purchased.

Use Commercial 2nd Mortgage as Rehab Capital.

Unfortunately commercial rehab loans are as daunting and cumbersome as ground up financing, requiring extensive underwriting and reporting. By tapping the equity in another property via a commercial fixed rate second mortgage the borrower can avoid the “process” of a traditional commercial rehab/construction loan. The borrower in this example would simply receive a lump sum of capital and can spend this money as he sees fit. There are no draws or city permit review/approval.

At the end of the project the borrower could refinance the loan of the property being renovated and use those proceeds to pay off the commercial second mortgage with better loan program tied to the rehabbed building.

Use Commercial Second Loan as Working Capital for Day to Day Business Activities.

Many borrowers do not like the idea of a floating rate line of credit. Many business owners prefer having the security of a fixed rate loan that enables them to better predict/manage their costs of capital. Business owners have virtually no restrictions on the use of loan proceeds. Common uses include, purchasing equipment, launching advertising campaigns, investing in new technology, etc.

Whatever the use or intent of the borrower, this new commercial second mortgage provides a solid option and an additional financing tool for commercial property owners.

By: Jeff Rauth

Second Mortgage Loans in Canada – How I Qualified and Saved My Credit

admin — Sat, 05 Dec 2009 19:10:32 +0000

The use of second mortgages by clients is more common then one would think. The common issue amongst my clients is what would the lender think and how would I qualify.

Income qualification is secondary to the LTV (Loan to Value) calculation on the property. The impact of the LTV is discussed in a future article (Second Mortgage Loan in BC with Bad Credit | LTV What the Heck is It?)

Where the income qualification comes in, is where the private lender determines if the client can survive and fund the balance of the 1st mortgage and the 2nd mortgage. Lenders in this category are not looking for trouble or foreclosures. They want to know that the clients can move forward and complete their obligation.

The income requirements can vary between the private lenders issuing second mortgages in BC.

Some private lenders have minimal requirements others look for complete confirmation of all income sources. The level of detail is usually tied to the rate. A lender of second mortgages who only considers LTV will usually have a higher tolerance for risk in the second mortgages they issue in BC. The rate will usually reflect the level of perceived risk.

Here is the interesting part, private lenders are intent on ensuring that the debt is paid. As I tell my clients…”The money people want their money” Not excuses, not we had a run of bad luck; sorry social services is down the hall.

The determination of income levels and personal budgets is an exercise that the borrowers should go through. No one wants to lose their house but that is precisely what will happen if you default on your second mortgage.

Prepare an analysis of what you make and how much you spend. Determine if you can make the mortgage payment, it may that the mortgage payment is less then your total payments today. However in some cases, such as when the tax man is knocking on your door with a lien, it is worthwhile considering the higher interest, fees and payments to ensure that your house remains your house.

Only .49% of mortgages in Canada are in default at any one time. The impact of a foreclosure will have a disastrous impact on your credit rating. Revising your lifestyle in line with your income may save your house and your credit rating.

Run the numbers, ensure that your income is sufficient to make the payments on the second mortgage. And on a final note, you may lie to your Momma; lie to the taxman but don’t lie to your mortgage broker when you are figuring out how to refinance your debt.

By: Duncan Seward

Why Second Mortgage Rates Are Higher for Home Equity Loans than 1st Mortgages

admin — Sun, 22 Nov 2009 23:30:45 +0000

Home equity is the difference between what you owe on your mortgage and the fair market value of your home. Cashing out on home equity for debt consolidation is continuing to gain popularity. The typical way to cash out on home equity is to either refinance an existing first mortgage or take out a second mortgage.

Many people wonder why the interest rates for second mortgages are higher than those for first mortgages. The reason for this is a second mortgage is a subordinate loan secured by the same property as the first mortgage. Thus, if the mortgage isn’t paid and there is a foreclosure on the property, the first lender is paid off before the second lender. As a result, second mortgages entail more risk for the lender. To offset the risk, lenders charge higher interest rates for second mortgages than for first mortgages.

According to BankRate, second mortgage and home equity lines of credit have become increasingly common since the mid-1980s as property values have soared and homeowners have learned about managing personal debt. Among the reasons for this surge in popularity: attractive interest rates and tax deductibility. Many times, home owners can deduct up to 100% of the interest they pay on mortgage loans off their taxes.

If you need to draw equity from your home and the rates on your first home are lower than the current rates, it will probably be cheaper to get a second mortgage even though interest rates are higher. If you have a specific purpose for the loan that requires a specific amount of money, a home equity loan, also known as a home equity installment loan (HEIL), may be your best bet. Home equity lines of credit (HELOCs) are useful for those who have an occasional or on-going need for money because interest is only charged on the amount of equity used.

Compare the annual percentage rate (APR), the cost of credit on a yearly basis, when shopping for a second mortgage. Unlike home equity loans that include the total credit costs for the loan, the advertised APR for home equity credit lines is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your loan.

By: Maria Ny