80-20 Mortgages

An 80-20 mortgage, or tandem loan or piggyback mortgage is taking out two mortgages to purchase a home. The first mortgage is for eight percent of the purchase price of the home and the second mortgage is for twenty percent of the purchase price of the home. Structuring the home purchase in this manner allows the buyer to purchase the home with no down payment.

80-20 mortgages are suitable for prospective homebuyers that do not have a lot of money available for their purchase, or would choose to use their cash for another purpose. It can be a great option for first-time homebuyers that don't have money from the sale of a previous home. An added bonus of an 80-20 mortgage is that it usually allows you to avoid private mortgage insurance (PMI).

There are drawbacks to financing your home purchase with an 80-20 mortgage. The biggest drawback is that you will pay a higher voerall interest rate. Typically the second mortgage in the package comes with an interest rate that is higher than most first mortgages.

Another drawback to the 80-20 mortgage is that it is slow to produce home equity. Until both loans are paid down significantly the homeowner will not be able to qualify for home equity loans, HELOCs or even mortgage refinancing. If the home is sold both loans will need to be paid off. The lack of equity may cause the homeowner to need another 80-20 mortgage to purchase a replacement home.

After having the loans for a few years and building a little bit of equity it is common for people to ask how to consolidate and 80-20 mortgage, or how to consolidate a first mortgage and second mortgage. This is simply a matter of doing a mortgage refinance. As long as both the first and second mortgages were used in their entirety to purchase the home there usually are no extra fees or higher rates involved.

In general an 80-20 mortgage is great for someone that wants to buy a home with minimal money out of pocket. A homebuyer should be aware of the shortcomings that are involved with this type of financing before proceeding with an 80-20 mortgage.

2nd Mortgages - A Benefit of Homeownership

If you own a home you can use it as collateral for a 2nd mortgage loan. Second mortgages may provide cash for any items you may need such as paying high interest debt, home improvements, college tuition or vacations. The interest rates on 2nd mortgages are typically much lower than credit cards, debt consolidation loans or personal loans.

Second mortgages are secured by your home. The amount that you qualify for will be based on the equity that you have in the home. The amount of equity that you have in the home is determined by subtracting your current mortgage amounts from the value of the property. Depending on your credit you may be allowed to borrow up to 125% of the value of the home. Obtaining a second mortgage for more than the amount of equity you have will lead to you having negative equity, or being "upside down" on the loan. Basically, this means that you will owe more than the perperty is worth.

Usually 2nd mortgages carry a higher interest rate than first mortgages. If you need cash and have significant equity in the home you may be better off with mortgage refinancing than with 2nd mortgages.

2nd Mortgages and Debt Consolidation

People frequesntly ask me if they should take out a 2nd mortgage to consolidate their debt and lower their monthly payment. The typical question will go something like this:

"I owe $40,000 on 5 credit cards with interet rates of 6 to 15%. The monthly payments are quite high. I can get a second mortgage at 9% to consolidate the debts and lower my monthly payments. Should I do it?"


My answer is a very firm "Maybe." Here's why:

Don't Pay Lower Rates With Higher Rates

Some of the credit cards that will be consolidated with the second mortgage have a lower interest rate than the mortgage. This will lead to a higher expense in the long run. If you do consolidate you should exclude the debts that have a lower interest rate.

Second Mortgages Reduce Your Flexibility

A second mortgage may cause the total debt on the property to exceed the value of the home. If you wish to sell the home and move in the future you will have to come up with the cash to pay off the mortgages out of your pocket.

Also, if future interest rates become attractive you may be unable to refinance. When you pay off the first mortgage the seond mortgage becomes the new first mortgage. You will only be able to get a new first mortgage if the current second mortgage lender agrees to move back into second position. Some lenders will readily do this for a fee, others may not do it at all.

Second Mortgages May Be Expensive

Typically there are closing costs or upfront fees when applying for second mortgages. Don't let the thought that you are not paying anything out of pocket make you think that there aren't any fees. Look at the bills you are paying off and the amount of your loan. You may find that the loan amount is $45,000 to pay off that $40,000 in credit cards. No cash out of pocket doesn't mean that you are not paying anything.

Danger of Overextending Yourself Again

I frequesntly see people pay off their credit cards with mortgages and then a few years later they have their credit cards maxxed out again. Since they've paid their balance down to zero they have all that extra credit available again. They open credit lines with no balance may even lead them to qualifying for more credit cards. Shortly after consolidating their debt they owe $40,000 in credit card debt again (or more). If you do use a second mortgage to consolidate credit card debt you need to be careful to avoid falling back into this trap.

Second Mortgages and Bad Credit

If you are interested in tapping into your home's equity to add cash to your pocket but have less than perfect, or even bad credit, you may have some options available. Second mortgages (also known as home equity loans) are available, even if you credit is damaged.

Second mortgages are basically a mortgage taken in addition to your primary mortgage. Because it takes a back seat to the first mortgage it typically comes with higher rates and fees than a primary mortgage. This is because if you default on one of the mortgages and your house is sold in a foreclosure sale the primary mortgage holder is paid in full first, then the remaining funds from the sale are used to pay off the second mortgage holder.

If you have bad credit and want a second mortgage you may have some options available. Many lenders will issue second mortgages even with poor credit, but you can expect to pay higher rates and fees than someone that has a good credit rating. In fact, with any loan the higher your risk to the lender the more you can expect to pay.

If you have bad credit, own a home and need cash you may have success with second mortgages.

125% 2nd Mortgages

Nearly everyone knows that you can obtain 2nd mortgages to tap into your home’s equity for cash. But what if you need cash and you have little or no equity? That is where the 125% second mortgage comes in.

125% second mortgages are frequently used to consolidate all your debts into one low monthly payment or put significant cash into your pocket. Here is an example of how they work:

Suppose your house is worth $250,000 and your current mortgage balance is $185,000. Typically, cash-out refinances allows you to borrow up to 80% of the value of the home. In this case, the maximum loan amount would be $200,000. Since you already owe $185,000 and there will likely be closing costs on the new loan, you are not able to obtain a significant amount of cash. With the 125% second mortgage you can take a loan for up to (you guessed it) 125% of the value of the home. In this case the total loans on the property could equal $312,500. Since you already owe $185,000 the 125% second mortgage could be in an amount up to $127,500. No that’s a significant amount of cash.

Most 125% second mortgages will charge you an upfront funding fee in addition to your regular closing costs. The upfront funding fee may be as high as 10% of the loan amount, or $12,700 in our example. Additionally, the interest rate you pay on the loan will be significantly higher than the interest rate on a generic cash-out refinance.

The extra fees and higher rates are a result of the increased risk to the lender. If you default on the loan the lender will foreclose on the home and sell it to recoup their funds. In the event of a foreclosure the lender is left owning a property that is worth less than the loan that was associated with it. That risk of loss is passed along to you, the borrower.

It is easy to see the risk to the lender. The risk to the borrower is not as obvious. You know that if you default on the loan you face foreclosure and losing your home. That goes along with any mortgage. Another risk is that you may be tied to the home for longer than you wish, or have to pay significant money out of pocket if you want to sell. In our example above the home was valued at $250,000 and the loans against it totaled $312,500. If you were to sell the home at market price you would have to spend $62,500 out of pocket to clear of the debts on the property, and that is not including any closing costs or moving expenses.

125% 2nd mortgages should be entered into carefully. Some of the situations where they make sense may include times when housing values are rising quickly, when you intend to keep the home for many years, when the money will be used for improvements or additions that will significantly increase the value of the home.

Used properly you can receive great benefits from 125% 2nd mortgages.

Second Mortgages

Second mortgages (2nd Mortgages) usually refers to a loan that is secured by real estate and is in subordinate position to another home loan on the same property.

When financing real estate a property may have multiple loans or liens attached to it. The first loan or mortgage registered to the property is considered the first or primary mortgage. Subsequent mortgages registered are considered a second mortgages or 2nd mortgages.

In most situations a 2nd mortgages comes in the form of a home equity loan. Home equity loans and second mortgages are exactly the same thing. The term loan simply refers to a debt whereas the term mortgage refers to a loan secured by a property. In effect, a second mortgage is a home equity loan secured by a property.

When a home is foreclosed on and sold the holder of the primary mortgage is paid first, then the second mortgage loan and so on. Since subsequent lien holders have a higher risk of loss 2nd mortgages usually have a higher interest rate then first mortgages.

The repayment period of second mortgages can vary. A 2nd mortgage loan may have a term as long as 30 years, or as short as one year, depending on how the loan is structured when it is originated.

Occasionally second mortgages are the cause of foreclosure proceedings. When the home owner falls behind on the 2nd mortgage the lien holder may buy the first mortgage loan from the issuing bank. If there is enough equity the lien holder may initiate foreclosure proceedings and sell the home at a profit.

Typically, when a home owner applies for a second mortgage loan the lender will analyze the borrower’s current equity in the property, debt to income ratio, credit score and employment history. If these variables lead the lender to believe there is a low risk of default the lender will issue a 2nd mortgage loan.

2nd Mortgages

Second mortgages (2nd Mortgages) are typically mortgage loans that are secured by real estate and are in a subordinate position to another home mortgage loan on the same property.

Real estate properties may have multiple mortgage loans or liens attached to them. The first home mortgage loan registered for the property is called the first mortgage or primary mortgage. Mortgages registered later than the first mortgage are considered second mortgages or 2nd mortgages.

In most cases a 2nd mortgages come in the form of home equity loans. Home equity loans and second mortgages are considered the same thing. The term loan applies to a debt while the term mortgage refers to a debt secured by a specific property. In effect, second mortgages are home equity loans secured by a piece of real estate.

When a property is sold in a foreclosure sale the holder of the primary mortgage is paid first, then the holder of the second mortgage loan and so on. Since the lenders on second mortgages have a higher risk of loss 2nd mortgages usually have higher interest rates then first mortgages.

There are many repayment periods available for second mortgages. A 2nd mortgage loan may have a term as long as 30 years, or as little as one year. The term is usually decided when the loan is originated.

Occasionally second mortgages will be the cause of foreclosure proceedings. When the home owner defaults on the 2nd mortgage the lien holder will purchase the first mortgage loan from the issuing lender. If there is enough equity the lien holder might initiate foreclosure proceedings to sell the property at a profit.

Usually, when a home owner desires a second mortgage loan the lender will review the borrower’s current equity in the property, ratio of income to debt, credit history and employment history. If this analysis leads the lender to believe there is a low risk of default the lender will issue the 2nd mortgage loan.

2nd Mortgages as a Source of Cash for Investment

For the most part, you can use the proceeds of your 2nd mortgages for any purpose that you see fit. With the stock market dropping over the recent past and current interest rates so low many people are considering using 2nd mortgages to obtain cash to invest in the stock market. Given the right amount of research and a solid plan, this may not be a bad idea.

One area that is gaining a lot of attention is alternative energy. Many companies are working hard to find clean, green sources of power that can be used to help reduce pollution and reduce our dependence on foreign oil. It is expected that many of these companies will have strong profits in the future. By investing in these companies you can help the environment and make some cash at the same time.

Investing in individual companies can be tricky and potentially risky. For diversification I would suggest investing in Green Mutual Funds, Alternative Energy Mutual Funds or Energy Mutual Funds.

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