The Direction of Second Mortgage Interest Rates
Second Mortgage Interest Rates - Direction?
In the current market place, second mortgages are available as hard loans in any amount from the equity in the collateral to 100%. Some unconventional lenders will even offer 125% of the collateral balance less the first mortgage balance. If a property has both a first and second mortgage equal to 100% of the property value and interest rates have dropped below both mortgage rates, the lender may do 100% refinancing.
Lenders who are involved with 100% financing will obligate the lendee to acquire private mortgage insurance (PMI). PMI is temporary and will be canceled when the home value goes up and the balance decline causes the loan to drop below 80% of the mortgaged property. There is no PMI required with second mortgages.
The most common methods used to refinance high interest second mortgages is an equity line of credit or a home equity loan. Both types of loans have reasonable closing cost depending on the state in which the borrower lives. In a home equity loan the cash is disbursed up front, while in an equity line of credit the funds are reserved for the borrower and he may draw on them as needed. This is referred to as the draw period. Both a home equity loan and an equity line of credit may have a fixed interest rate or an adjustable rate tied into an index.
If a property is mortgaged above 80% of the fair market value, the lender will require a higher rate of interest. If a second mortgage is close to 100% of the security used for collateral the lender may ask for a premium on the loan to offset the risk taken.
A lender holding a second mortgage in foreclosure would have to buy out the first mortgage to protect their interest in the property. If the property had an 80% first mortgage and a security value of $100,000, the second lender, in order to protect his interest at foreclosure, would have to satisfy the first mortgage to acquire the property.
If the second mortgage only made both mortgages equal to or less than 80% of he property value the interest rate would have little or no premium. 2nd mortgage rates will vary depending upon equity to value, credit score and loan amount.
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