Using an 80 20 Mortgage to Avoid Mortgage Insurance
An 80 20 mortgage is also called a zero down loan or no money down loan. It is actually two loans, a regular home mortgage which constitutes 80% of the price of the home and a second mortgage or home equity loan that consists of 20% of the cost of the house. The idea behind this type of loan is avoiding mortgage insurance (PMI) by using the home equity loan as the down payment.
Just about all mortgages require some form of mortgage insurance if you are unable to make a down payment of at least 20 percent. By obtaining a second mortgage or home equity loan for 20 percent of the homes cost you can circumnavigate this requirement by using that second loan as the down payment.
There are variations of this type of mortgage such as an 80-15-5 loan. This means that the borrower got a main mortgage of 80 percent of a home’s purchase price, a piggyback loan for 15 percent, and made a 5-percent down payment. This can be a good option if you have some money for a down payment but not enough to cover the entire 20%.
The second mortgage can either be a fixed second mortgage or it can be a line of credit. If it is a fixed second mortgage then the interest rate is normally fixed for the entire length of the mortgage. Most fixed second mortgages are a 30 due in 15 which means that the second mortgage is amortized over 30 years, but is due in 15 years. The benefit of going with the line of credit as the second mortgage is that the interest rate is normally much lower than the fixed second mortgages rate. They can also be an interest only loan which could save you hundreds of dollars in mortgage payments every month.
The 80 percent first mortgage can be a fixed-rate (15-year or 30-year), adjustable-rate (usually 5/1, 7/1 or 10/1fixed period ARM) or interest-only loan. Typically, the interest rate on the second mortgage loan is higher than the interest rate of the first loan. But because the borrower doesn’t have to pay mortgage insurance, the overall cost is less than a traditional mortgage even with the higher mortgage interest rate on the second loan.
Plenty of mortgage programs allow borrowers to buy houses with little or no money down, but they usually require private mortgage insurance, or PMI. Getting an 80 20 mortgage can be a good way to avoid the extra cost that PMI will add to your monthly payments.
By: Andrew Bicknell
Second Mortgages in Canada: When & How?
A second mortgage is a loan you get in addition to the first mortgage that you have already registered for your home.
Second mortgage rates are generally higher because second mortgages are relatively riskier for the lenders. In order for you to understand why it is so, and decide whether or not a certain second mortgage rate is reasonable, let’s have an example of a second mortgage.
Imagine the value of your home in Canada is $350,000 and you have already got a $200,000 mortgage for your home through a mortgage company In Canada. The remaining will be $150,000 ($350,000 minus $200,000). This is your home equity. In other words, this is the part of your home value that you have not received a mortgage for. Therefore, you don’t owe this much of your home value to a mortgage company.
Now imagine that you need $100,000 for a reason. Because your home equity is $150,000, you can then ask for a $100,000 loan, which is less than $150,000. This new amount that you get as a loan is called a 2nd mortgage. Sometimes second mortgage might be also called home equity line of credit or home equity loan, but they are second mortgages if they are taken in addition to your first mortgage.
In Canada, in order to get a better interest rate, your second mortgage must be insured and the mortgage default insurance premium will be then added on top of your basic loan amount. Although it may first seem that the amount of your second mortgage has been increased, you will usually have lower rates for you mortgage with lower monthly payments when you insure your second mortgage.
In a fixed rate mortgage, as the name suggests, the interest rate for your mortgage is fixed for an appointed period of time which in Canada is usually between 6 months to 25 years. The good thing about a second mortgage with a fixed rate is that you know how much you are paying for a set period of time which is technically called ‘term’.
In contrast, you may want to go for a second mortgage with a variable rate. This means that the fluctuation in the interest rate will determine how much your monthly payment will be appointed for the principle of your mortgage and what portion to be appointed for the interest. If interest rates go down, more of your payment will help reduce the principal of your second mortgage; if rates go up, a larger portion of your monthly payment will be appointed to cover the interest rather than the principle. Although interest rates may fluctuate from month to month depending on market conditions in Canada, the payments of your second mortgage are fixed for a period of one to two years.
Because second mortgage rates, and generally mortgage rates, change quite frequently, you many want to choose a longer-term mortgage if you don’t want to involve yourself with the rate changes. But if you want to choose a more flexible option, a shorter-term mortgage then allows you to potentially take advantage of lower rates.
By: Arash Svd
The Second Mortgage Home Equity Loan
A second mortgage can also be referred to as a home equity loan. It is in essence a secured loan that is second, or subordinate, to the first mortgage against the property. The key issue for anyone getting this type of loan is the amount of equity they have in their home. This will ultimately determine the amount of money that can be secured for the home owners use.
Equity is the amount of money that is paid down on the home, or it can be the value of the home minus any loans owed on the home. The main reason for taking out a second mortgage is to take equity from your home and turn it into cash in pocket. What this means is that if you have enough equity in your home you can borrow money using your home as collateral. There are three basic types of loans to choose from: the traditional second mortgage, a home equity loan, or a home equity line of credit.
A second mortgage should not be confused with a mortgage refinance or re-mortgage. When you refinance your first mortgage you are replacing your old loan with a new loan, usually at a better interest rate. A second mortgage, or home equity loan, is another loan in addition to the primary loan, which will result in two monthly payments. It is important to distinguish the two to make sure that two payments will not seriously affect your monthly budget.
The interest paid on a second mortgage, up to the first $100,000 borrowed, is tax deductible provided that the loan is on your primary residence. It should be noted that interest rates on home equity loans are generally higher than a first mortgage, usually in the 2-4% higher range. But the interest rate on a this type of secured loan will be lower then on an unsecured loan, such as a car loan, and much, much lower then you will find on a credit card.
The common reasons to get a home equity loan are to pay off high interest credit cards or other higher interest rate debts, refurbishing the home, urgent family matters such as education, medical, etc. This is called debt consolidation and refinancing and is a good way to tap the asset value of your home to meet your investment and budget needs, and helps you avoid incurring high interest unsecured debt like credit cards. If you have extensive credit card debt, and are not making progress in paying it off on a monthly schedule, a second mortgage may be a good move.
There are a couple of things that anyone getting a home equity second mortgage should be aware of. A second mortgage puts a second charge on your home, meaning that the second mortgage provider can take a share of any proceeds if your home has to be sold. What is worse, if you pay the first mortgage but fail to pay the second, that mortgage provider can seize your home, even if the sum involved is relatively small.
Getting a second mortgage home equity loan can be a good way to use the equity in your home to do any number of things. Like all financial decisions using a second home loan should be carefully considered in all aspects. If it makes sense and fits within the monthly budget then it is something to be strongly considered.
By: Andrew Bicknell