Solano Real Estate Scene: Second mortgages more attractive as interest rates rise

Solano Real Estate Scene: Jim Porter

Article By: Jim Porter – October 7, 2022

A second mortgage is loan secured by a deed of trust on real estate. The second mortgage is a junior lien to the first mortgage and is secured by the equity that exists above the first mortgage balance.

There are many reasons a person may choose to take out a second mortgage, but the primary reason today is that most homeowners have a first mortgage at a much lower rate than today’s rates and they certainly wouldn’t do cash-out first mortgage refinance to get $100,000 for a home improvement project or a debt consolidation if their $400,000 first mortgage was at 3.5% fixed.

HELOCs, or home equity lines of credit, are popular but a closed end 10- or 15-year fixed-rate second mortgage is another alternative when looking for cash out and the homeowner doesn’t want to touch their low-rate first mortgage loan with a 10-foot pole.

HELOCs are adjustable-rate loans that can change monthly, and most are based on The Wall Street Journal prime rate plus a margin based on FICO score. A bridge loan is usually secured by a second mortgage, and the purpose of this type of loan is for people who are selling soon but need the money required now so they can buy the new home first and sell the departing residence after they move into their new home.

Second mortgage loans are now very popular, but every homeowner’s case is different and should be reviewed by a qualified mortgage professional.

Credit card debt, student loans, personal loans and auto loans can overwhelm people with monthly payments and interest costs. If a homeowner has $120,000 worth of this type of debt, they may have a total of $2,000 per month in payments. If this homeowner has enough equity in their home and can obtain a $120,000 fixed-rate loan at a lower rate than they are paying on all this other debt, it might save them $1,000 to $1,200 per month.

The key thing to remember when doing a consolidation loan is to make sure the $1,000 per month in savings is spent wisely by paying down the mortgage or, better yet, investing the savings monthly so the next time something is needed, credit cards are not used because credit cards should always be paid in full monthly.

Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.