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Second Lien Mortgage Avoids the Higher Interest Rates Staff - Mortgage Lenders Plus.com

A second lien mortgage is simply a second mortgage taken out on your property which establishes a second lien on the home, usually “junior” to the primary mortgage. This means that the second lien gets paid off second, and the lender on the primary mortgage has first call on recovering funds in the event of a foreclosure or other financial meltdown on the part of the borrower.

Second lien mortgages include the “piggyback” loans that became popular over the last ten or fifteen years. These are loans that are taken out in conjunction with a primary mortgage, usually in order to allow the borrower to ostensibly provide a twenty percent down payment against the primary mortgage. This accomplishes two goals: one is to make the borrower eligible for a fixed rate mortgage and the other is to avoid mortgage insurance, a required expense for any borrower who takes out a loan of more than eighty percent of the home’s value.

Another popular use of second lien mortgages is avoiding the higher interest rate of a “jumbo” mortgage. The FHA will only underwrite mortgages up to a certain limit – currently $417,000. Any mortgage bigger than that must be provided by a private lender and insured by a commercial entity. That makes jumbo mortgages more expensive that so-called “conforming” mortgages; one way of maintaining a conforming primary mortgage (of $417,000 or less) is to take out a second lien mortgage to cover the balance of the home price, less the down payment.

A borrower facing a loan amount which would be considered a 'minor' jumbo -- for example, $480,000 -- might instead split that into two loans for $400,000 and $80,000. Instead of paying the one-eighth to one- quarter percent premium typically found on a jumbo mortgage's price, the borrower instead gets a lower interest rate for much of his loan, and the much smaller portion carries a higher interest rate.

Piggybacks are often fixed-rate first mortgage and fixed rate second mortgages, but a variety of packages are possible. Common offerings include a fixed-rate first lien plus a variable-rate second lien mortgage or HELOC; or an adjustable rate first lien with a fixed-rate second lien, or a deal in which both liens have adjustable rates.

Usually, the first mortgage portion is a long-term loan - 30 years being the most likely period. The second lien mortgage will likely amortize in 10, 15 or 20 years and carry an interest rate perhaps two percent above the primary mortgage rate.