By taking out a second mortgage on their home, borrowers can turn existing equity into cash to consolidate debt, fund home improvement projects, contribute to an investment home purchase, or build a secondary unit.
The second mortgage also offers owners creative solutions to financial problems. We have seen second mortgages (also called “second liens“) used to pay down first mortgages and eliminate mortgage insurance. We have seen owners use a second mortgage to keep a desirable first lien intact while cashing out equity to use for other purposes, such as college tuition.
The only problem with second liens is that they are hard to find – today, anyways.
“In the first quarter of 2007, there was something close to $90 billion in equity lines originated,” said Daniel Podesto, co-owner of Central Coast Lending, a mortgage lender based in San Luis Obispo County, California.
“In the first quarter of 2014, there was about 9 billion originated.”
Additional liens were common during the housing bubble – even excessively so.
“Homes were used like a credit card to purchase vacations, cars, and boats,” said Podesto. “The extra credit was easy to get. The model wasn’t sustainable.”
When the housing bubble popped loan defaults multiplied. Many second lien holders were left with nothing. Since then, lenders have been slow to offer second mortgages.
“Right now, nobody wants to be in second position,” said Podesto.
Central Coast Lending, on the other hand, offers second mortgage solutions for its clients.
Types of Subordinate Financing
Subordinate financing can be structured in two ways:
1) The Piggy-Back (a.k.a.: Concurrent Lien, First and Second Combo)
Borrowers purchasing a home, are able to use a “piggy-back” their first mortgage in with a second mortgage to give them additional flexibility in the formation of their repayment plan.
2) The Standalone Second
Borrowers can also take out a second lien independent from the first. In doing so, the borrower can take cash out of their equity to use for other purposes while preserving their first lien.
Structures for Subordinate Financing
Lenders offer two structures for second liens:
1) Home Equity Line of Credit (HELOC)
The HELOC is a revolving line of credit that allows homeowners to turn home equity into cash for ready use. Some of the best uses of a HELOC allow borrowers to free up cash for debt consolidation (credit cards, car, student loans) and home improvements.
2) Closed-End Second
The closed-end second lien sets a fixed interest rate and a specific payment schedule. This format offers security for borrowers with a plan that they can reliably execute.
Second Liens in Today’s Market
Lenders are hesitant to issue subordinate financing due of the increased risk of being in junior position. The most recent housing bubble, for example, saw equity (and value) vanish rapidly. In foreclosure situations, lenders simply found that their second or third lien didn’t hold any value. Even the holders of the initial (first) lien were not able to recoup all of their initial loan.
Even as the housing market (and economy) has recovered, banks remain hesitant to offer subordinate financing. Central Coast Lending, however, is able to lend on an assortment of second lien situations, which can help borrowers consolidate debt, fund home renovations, or take out a new line of credit.
Give us a call at 805.543.LOAN or an email at info@CentralCoastLending.com with any questions. You can also set up a pre qualification appointment to learn about the possibilities that mortgage financing have to offer.
Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call us today at 805.543.LOAN or email firstname.lastname@example.org to set up a free pre qualification. We are The Mortgage Experts: ask us anything!