Second Mortgages

Eeeeps! Many lenders for second mortgages and home equity lines of credit (HELOCs) are retreating from the marketplace. The old days of cheap 'n easy seconds are fading fast.

Thanks to the Fed, Prime Rate has recently fallen to 7.5%. This usually immediately helps lower the interest rate on many seconds. (Different story with first mortgages, though.) Unfortunately, due to losses and the subsequent pressure to raise underwriting standards, some lenders have dropped out of this line of business and others have eliminated stated income loans and reduced their combined loans-to-value limits. They have also generally raised their margins over Prime and are directing interest rate penalties to borrowers with less than stellar credit scores.

If you are contemplating purchasing residential real estate with less than 20% down, you should consult with a mortgage broker (I happen to know a good one!) immediately to research what the best course of action may be: second mortgage or mortgage insurance. The particulars of your situation need to be taken into account: ability to fully document income or need to go stated; credit scores; employment history; volatility of your area's housing market, etc.

One should also consider the strategy of obtaining mortgage insurance instead of a second and having a motivated seller help pay some or all of your mortgage insurance premium. Another possibility is to ask the seller to pay your closing costs to enable you to put more money down. Or ask for both -- it's a buyer's market in many areas! Make sure these types of seller concessions do not exceed the lender's limits -- generally 6%.

If you are planning on taking out a standalone second mortgage behind an existing first, then be sure to shop carefully. The fine print of an advertised offer may show a 10 or 20 year amortization instead of 30 years, and the pricing may go up after a short teaser rate period. There may be substantial closing costs and a prepayment penalty. Also, if your credit scores are not in a lofty range, the lender may change the offer to a higher rate. If the amount of cash you wish to obtain with a second mortgage is sizable, it may make more sense to do a cash out refinance of your first mortgage.

Mortgages explained and demystified. Call 408/483-2730.

THE FEDERAL RESERVE AND MORTGAGE RATES

Consumers are often confused when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. News coverage of the Fed can actually cause the confusion.

The Fed affects short-term interest rate maturities, the Federal Funds Rate, and the Overnight Lending Rate. These factors have a direct impact on the Prime Rate. However, it is a mistake to conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. Mortgage interest rates fluctuate with the market for mortgage-backed securities, which trade on a daily basis. Money to purchase mortgage-backed securities comes from overseas investors as well as domestic investors, and the flow of huge sums of money to and from these securities is subject to competition from the stock market and complex economic and political influences.

A key (but not infallible) indicator for the movement of mortgage interest rates is the 10 year Treasury bond yield. It is widely quoted, and if it is heading up, you should be prepared to face higher mortgage rates. It fluctuates constantly, and so do mortgage rates.