When you take a loan (in addition to a mortgage) to make a down payment, it is called a silent second mortgage. And while a quiet second mortgage may sound like a good deal, there are right and wrong ways to do it. The following is an example of a silent second mortgage, the risks, pitfalls, and how to legally take out a second real estate mortgage if you need money for a down payment.
What is silent second mortgage?
The second mortgage is an additional mortgage on one real estate. It is considered “silent” if this second mortgage or loan is used to secure an advance payment and then not notified to the original mortgage lender before closing. Failure to disclose a loan to a lender is very illegal, and borrowers who fail to do so may be prosecuted.
How does silent second mortgage work?
For example, suppose you want to buy a house for $ 250,000. You have received a $ 200,000 mortgage that requires a down payment of $ 50,000. You do not have the full $ 50,000 in cash or liquid assets for the down payment; you only have $ 10,000. So you decided to take out a silent second mortgage of $ 40,000. The initial lender estimates that your down payment is $ 50,000, when in fact it is only $ 10,000 ($ 50,000 to $ 40,000).
Who is at risk in silent second mortgage?
When buying an expensive home, the collateral is the object being bought (house). So, if there is another loan secured, it is a big problem for the bank, especially if it needs to seize the house in case of foreclosure. They cannot obtain a clear title (ownership) to the house in the event of foreclosure if the property has other outstanding mortgage rights.
Neglecting the legal aspect, even though buying a home without money sounds like a great opportunity, a quiet second mortgage is bad news for borrowers. With a second mortgage, the buyer always takes on more debt, often at a higher interest rate than with low mortgage rates, and over time he pays more interest. Not to mention that without real money, the buyer will have to wait longer to earn real capital in the house.
What are the disadvantages of silent second mortgage?
- Decrease in equity: One of the most obvious disadvantages of getting a second mortgage is that you reduce equity by taking on additional debt. If the market changes and the value of your property decreases, getting a second mortgage can put you under water or destroy any capital you once owned.
- Risk of losing your property. In addition, if you stop making payments, you will jeopardize your home or property. A second mortgage lender has the same right to sue or sue to recover your debt as a first mortgage lender, even if you are still paying your first mortgage. Find out how much housing you can afford with our handy calculator.
- High cost: Another disadvantage is the high cost of the second mortgage. Second mortgage loans often charge a higher interest rate than traditional first mortgage mortgages, with additional fees for closing costs such as loan fees, appraisal and underwriting.
- Difficulties with qualification: Even if you have property in your home or you need assistance for the down payment, you may not apply for a second mortgage. Most lenders have special requirements, such as a minimum interest rate, credit rating or market value. Although getting a second mortgage is an option for many, it is not available to everyone.
What are the types of silent second mortgage?
· Home equity loan
One of the most common types of second mortgage loan is a real estate loan, which allows property owners to borrow at the expense of equity. Equity is the market value of a property relative to the amount of the loan. As the mortgage loan is repaid or the value of the property increases, equity is formed.
If the borrower has sufficient equity in his home, he may be eligible for a real estate loan that provides the borrower with a lump sum or a line of credit for use in cash, repaying the borrowed amount over time. With a one-time second mortgage, the borrower receives the full amount in advance, often with fixed interest rates and fixed monthly payments.
In the second mortgage of a credit line, called a real estate credit line (HELOC), the lender sets the maximum amount of the line and the period of use when the borrower can, if necessary, withdraw funds up to the maximum loan limit. HELOCs often have variable interest rates that are adjusted based on the amount currently used.
· Down payment assistance
Another less popular type of second mortgage is down payment assistance. Some lenders, government agencies, non-profit organizations or companies offer financial assistance to borrowers by providing them with some or all of the funds required for the down payment on a home loan. Depending on the program, the credit institution may register a second mortgage for the amount of the down payment with or without repayment requirements.
For example, if you only had $ 2,000 to set aside for your home and you were eligible for a $ 110,000 first-rate assistance mortgage, you could get a second mortgage for the remaining $ 8,000 needed to down payment.
Is silent second mortgage fraudulent?
A silent second mortgage becomes a mortgage fraud if it is intentionally intended to defraud the lender. This practice is defined as a second pledge of property that is not disclosed to the creditor and is not usually recorded in any public records.
In some cases, the buyer may take a secret loan from a third party to repay the down payment. The financial site Investopedia claims that this gives the lender the false impression that you have enough real estate equity to cover a significant drop in house prices, when in fact you will be underwater with a loan with much less change in the market. If you comply with an agreement to borrow from one lender without warning another, you may be convicted of a mortgage fraud and sentenced to imprisonment and fines.
What is the interest rate on silent second mortgages?
As a rule, interest rates on the second mortgage are usually higher than the interest rates set for the first mortgage. This is because issuing a second mortgage is a greater risk for lenders. And as a general rule in lending and lending: the greater the risk, the higher the interest rates. You can check how high your interest rates will be with a second mortgage calculator.
What happen to silent second mortgage in case of a foreclosure?
When you first get a second mortgage, the lender imposes a new mortgage on your property when you get the loan. Once you have collateral, the lender will be entitled to receive proceeds from the sale of your home in the event of foreclosure.
If you end up facing a foreclosure or have to sell your home before you can repay your mortgages, you will first have to pay the lender with the first mortgage and then mortgage the second mortgage. However, under such an arrangement, if there is a shortage of cash, the second mortgage lender may suffer from the sale of the property.