In some situations, homeowners may be able to have more than one mortgage on their homes. Learn more about when and why this might happen.
Most people need to borrow money in order to realize the dream of home ownership. Thankfully, many mortgage products are available to help people afford their ideal home. A homebuyer provides a down payment, which is typically 10% to 20% of the purchase price. Their mortgage lender provides the rest. The homebuyer makes monthly payments of principal and interest, and the lender places a lien on the home to protect their investment.
A homeowner can have more than one mortgage on a property in certain situations. They may obtain two loans at the time of purchase, or they may borrow against their equity in the home at a later date.
Mortgages, Liens, and the Right to Foreclose
A typical mortgage includes the lender’s right to foreclose on the home if the owner defaults, or stops making mortgage payments. A lender will only release a lien when the homeowner has paid the mortgage in full.
Referring to a mortgage as a “second” mortgage implies that the home is already subject to a mortgage lien. Both lenders have the right to foreclose on the home if the homeowner defaults. The “purchase money” mortgage usually has priority over the second mortgage.
Types of Second Mortgages
A homeowner may be able to obtain a second mortgage at the time they purchase the home in some situations. Once they own the home and have paid off part of the first mortgage, they may be able to take out another loan based on their home equity.
Conventional mortgage loans require a homebuyer to make a down payment of up to 20% of the total purchase price. The mortgage loan covers the other 80%. A homebuyer might be able to obtain a second mortgage loan, known as a “piggyback mortgage,” to cover part of their down payment.
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A piggyback mortgage loan might cover half of the buyer’s down payment, or 10% of the purchase price. For this reason, this type of loan is also called an “80-10-10 loan.” If a homebuyer has a contract with a $500,000 purchase price, many conventional loans will cover $400,000. A piggyback mortgage would contribute $50,000.
Advantage: One advantage of a piggyback mortgage is that it can allow you to avoid private mortgage insurance (PMI). Lenders may require a homebuyer to obtain PMI when they make a down payment of less than 20% of the purchase price.
Disadvantage: Piggyback mortgages often have a higher interest rate than conventional mortgages. This can offset the benefit of avoiding PMI.
Home Equity Loans
The difference between the value of a home and the outstanding balance on the mortgage is known as the homeowner’s equity in the property. If you own a home valued at $750,000 with a mortgage balance of $350,000, your equity is $400,000. This is the portion of the home’s value that you own free and clear of your mortgage lender’s lien.
A home equity loan allows you to borrow money against the value of your home even if you still have a mortgage. The maximum amount that you may borrow is limited to part of your equity. The total amount that you may borrow against the value of your home is typically 80% to 85% of the home’s value.
For the home valued at $750,000 mentioned above, the maximum amount of mortgage debt the homeowner could have, at 85%, would be $637,500. If the homeowner has an existing mortgage balance of $400,000, they could not borrow more than $237,500 in a home equity loan. If the homeowner has paid off their mortgage, they could, at least hypothetically, borrow the entire $637,500.
Home Equity Lines of Credit
A home equity line of credit (HELOC) is similar to a home equity loan. Instead of receiving a lump sum from a lender, a homeowner can draw money as needed up to a limit based on the home’s total value.
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