What Is A Second Mortgage?

A second mortgage is a subordinate mortgage loan, meaning it’s not the first in line to be paid in case of a default. For example, say you are defaulting on a property which you owe $100,000 on. You owe $80,000 on the first (non-subordinate mortgage) and $20,000 on the second mortgage. Now assume that, due to the real estate crash, your property is only worth $70,000. In this case, the holder of your primary mortgage loan will receive the full $70,000 of the sale (but still less than the $80,000 they are owed). In this case, the owner of the 2nd mortgage would receive nothing because it is a subordinate loan. The second mortgage holder only gets paid after the first mortgage holder is paid in full. Second mortgage loans are thus riskier and hence sport higher interest rates to compensate.

How Does A 2nd Mortgage Work?

Second mortgages work much the same as any other mortgage. You generally agree to borrow money for a specified period of time (5 years, 10 years, 15 years, 30 years, etc), with a few important variations. Like first mortgages, you will pay back the 2nd mortgage monthly on a schedule calculated in advance by your lending institution (perhaps with known adjustment dates). Also like first mortgages, second mortgages can have fixed or adjustable rates, and there are even interest-only options available. In fact, it’s probably the case that interest-only mortgages and ARMs were (are) even more common with second mortgages than with first. This is because many homeowners are, almost by definition, stretching themselves to the limits to afford the monthly payments on their new properties. If they weren’t, they’d probably just go the traditional route by making a 20% down payment and taking out a single 30 year fixed rate mortgage.

Unfortunately, the consequences of defaulting on your 2nd mortgage are every bit as severe as those for defaulting on any other mortgage. If you miss too many payments, your lender will initiate foreclosure proceedings. In the event of a foreclosure, your second mortgage lender will most likely buy your first mortgage from the other lender (if they don’t own it already) and start the foreclosure process. At this point, you’re probably screwed unless you can bring your payments up to date or unless you qualify for one of the loan-modification programs enacted after the crash.

Taxable Or Tax-Deferred?

With domestic REITs this is an easy one: you should always own REITs in a tax-advantaged account if at all possible. This is because REIT dividends are taxed as regular income instead of the lower tax rates afforded qualified dividends from most other kinds of corporations. However, the foreign tax credit clouds the issue somewhat. Mutual funds owning the stocks of foreign companies are generally required to pay income taxes on dividends received to the stock’s host nation. Normally, you (the investor) can then claim a foreign tax credit to recoup at least some of the taxes paid to foreign governments. The catch is, you can only do this if you hold the fund in a regular taxable account. If you hold the fund in a 401k, IRA, or other tax-advantaged account this tax credit isn’t available to you at all. So you have to choose: do you pay foreign taxes or do you pay domestic taxes? With foreign real estate, you can’t avoid both. Of course, this is true with all foreign stock and it hasn’t stopped me from whole-heartedly recommending foreign stocks. Still, it’s something to keep in mind.

Is It Worth The Higher Expense Ratio?

The Vanguard fund is reasonably priced with an expense ratio of just 0.50%. Still, that’s more than twice the price of domestic REIT exposure. Are the additional diversification benefits of owning foreign real estate worth the price? I have no idea, which leads me to my next point…

Just How Much Diversification Would You Gain, Anyway?

To the best of my knowledge, there is no comprehensive source of data on foreign real estate as an asset class (please correct me if I’m wrong). Would these securities correlate well with domestic real estate?  Or maybe move lock-step with foreign stocks?  If so, there’s not much diversification benefit to be had. The problem is, there’s not enough data to make a reasonable judgement one way or another. Foreign real estate could end up being a great diversifier. Or not. For this reason alone, I probably wouldn’t advocate more than a token 5% allocation to this asset class. For now.

The Inclusion Of Real Estate Related Companies

The REIT legal structure doesn’t exist in many countries, meaning you would also probably own stocks in a few real estate development companies, property management companies, and the like. There’s nothing wrong with owning stock in these kinds of companies, but they don’t exactly provide pure exposure to foreign real estate values. This factor would lead me to believe most foreign real estate funds would tend to be more or less correlated with other more general foreign stock mutual funds. Again, there’s nothing wrong with that, but it’s not really what you signed up for.

So should you own foreign real estate? For me, the negative factors outweigh the positive for the time being. I will definitely revisit the decision after I have a few more years of data to look at, though.

1. Check your credit. A low credit score is a problem for many adults. Most of us never learn how to manage money (or learn too late) and because of that we spend on credit to an alarming degree, often getting in way over our heads. And a low credit score can spell disaster for those who wish to buy a home. High-risk borrowers will be approved for less money, face higher interest rates, or even be denied outright. So if you want to shoot for the dream home, learn how to manage your money and raise your credit score. Somewhere along the line, you may discover that spending within your limits is a better plan than shooting for the moon.
2. Calculate monthly payments. Remember a little equation from algebra called the principal-interest formula? If you thought math would never come in handy, you’re about to eat your words. You can use this formula (found online in detailed description) to determine how much your monthly payments will be for a certain loan amount at a certain interest rate over a certain amount of time. Or you could just ask the bank to figure it out for you. The point is, you don’t want your payments to exceed one fourth of your monthly income; otherwise you will have to cut back in other areas (or face the consequences).
3. Assess your savings. Saving for a rainy day is important, especially in these tough economic times. The general rule of thumb when it comes to liquid assets is to have at least three months’ worth of salary tucked away so that you can continue to pay your bills if you lose your job. However, if you’ve bitten off more than you can chew with your mortgage payment, you’re not going to be able to save a penny. In fact, you will likely be living paycheck to paycheck or digging yourself a pretty big hole of debt. If you find that you can’t save money despite an ironclad budget, you’re probably spending too much on your mortgage.
4. Look to the future. Consider your prospects for the future. Are you going to get that raise you’re counting on, or magically make more money at some point? Maybe you’ll win the lottery or a rich relative you never heard of will leave you everything. You’re beginning to get the point. You can’t live on a pipe-dream; you can only depend on what you have right now (and maybe not even that). So be conservative and plan for a future in which you are making the same amount of money (or even less). This way you won’t be too disappointed when that promotion doesn’t come through (and you’ll still have a house to come home to).
5. Expect the worst, hope for the best. Facing the reality of one’s financial situation isn’t always easy, but plans can change. Even if all you can afford right now is a shoebox-sized condo, future successes could allow you to trade up (while failures will come as less of a blow if you don’t have to lose your overpriced Malibu dream house in the process). So plan for the absolute worst possible outcome, but keep working towards your dream. If you’re smart about choosing a house you can actually afford right now, the one you covet may soon be within your reach.

Sarah Danielson writes for AdvanceMe, the nation’s leading merchant cash advance provider and credit card factoring company.

However, knowing you have a lot of equity in your property is a good feeling. It means that a greater percentage of the proceeds from the sale of your home would go to you, once you’d repaid the bank. It means you should have more money to take with you as a deposit when you’re looking for a new house with a new mortgage. It even means you’ll have more leeway in terms of considering lower offers for your current home, if you need to do this to get a quicker sale.

So when you hear of house prices falling, it’s only normal to worry about the diminishing levels of equity in your home. The less equity you have, the less security you’ll have, and the closer you’ll be to being in negative equity – or being underwater, as it’s often called – which is when the amount of debt secured on your property is actually higher than the value of the property.

Negative equity can be a real problem, making it much harder to move home – but it needn’t actually be an immediate problem if you can afford to wait.

If you’re content to stay in your property, you can simply ‘wait it out’ until things improve. This can happen for various reasons – here are a few to think about…

House prices go up and down all the time. Sooner or later, the housing market will recover and prices will start going up again. If you can wait until your property is worth more than the mortgage debt secured against it, you’ll no longer be in negative equity.

You’re slowly paying off your mortgage anyway. Every time you make a mortgage payment – unless you’re on an interest-only deal – you’re reducing your mortgage debt a bit. If you can keep doing this (and assuming house prices don’t crash to unexpected lows), you could find you’re out of negative equity sooner than you thought.

Your house isn’t ‘average’. Everyone talks of average house prices as if they were a universal truth – but they’re not.

• What if you’ve put a lot of time and effort into your house and it looks twice as good as it did when you bought it?
• What if the area you’re in hasn’t suffered so much from the falls in property prices we’ve seen in recent years?
• What if the area you’re in has actually improved (new schools / new roads / anything that makes it more attractive) and this has helped maintain prices – or even raise them?

Get your property valued and you might find that you’re a lot less ‘underwater’ than you thought you were!

Anyone can worry about being in debt, especially when that debt’s measured in the tens of thousands. If you’re worried, get some debt advice before any problems you’re facing have a chance to get any worse.

A no cost home loan refinance is very misleading. There are many fees incurred while making a mortgage loan, such as processing and underwriting fees, appraisal fees, and title and escrow fees, not to mention loan origination points that have to be paid by someone. All these fees must be paid for and guess what?  The bank isn’t going to pay them for you.  What they will do is roll these fees into the mortgage balance or compensate by raising your mortgage interest rate.  So “no up-front fee home loan refinance” would be more accurate.

The American way is for people to look for good ways to get something for nothing, and lowering their monthly mortgage payment and the promise of a better interest rate on their home mortgage is appealing. Many are looking at a no closing cost home loan because they do not have the money for closing costs. A lender or bank may put your closing costs in a bundle on top of the loan amount, which increases the size of your loan.

In order to make up for the fees that are normally charged at closing, some banks and lenders will bump up the interest rate to make up the difference. The no cost refinances can vary by lenders and while some of the programs may cover all the costs, there are others that still charge you for some third-party fees. The no cost home loans can be a good loan program for you as long as you are aware of what is really happening.

The type of people who benefit from the no closing cost home refinance loans are those who either refinance often or plan to upgrade in a few years. They are probably not beneficial for anyone who plans to stay in it more than five years or after their break even point concerning their closing points takes place.  These are not good or bad loans; they need to be studied so you understand them before you take one.

None of this is to say that no cost refinances can’t be a valuable financial tool, but they are certainly not appropriate for most homeowners and are somewhat sneakily marketed. Correctly using these loans is a simple matter to figuring out at what time the closing costs would be paid off over the cost of the new loan and adjusting accordingly.

A home equity line of credit is a good option for people who want the flexibility to borrow again and again. However if you have a poor credit history it will be hard to be approved for a bad credit home equity loan and there are more obstacles to overcome. Many people are amazed at the outrageous costs of a bad credit home equity line of credit.

As an alternative, home equity loans for people with bad credit are hard to find, but they do exist. This is basically a second mortgage; a one-time loan secured against the property. The first thing a lender will do when someone with bad credit applies for a home equity loan is examine their credit history and look at his or her credit score. They will want to know how many payments were missed or late, and how many loans have been defaulted on. They may agree to give credit, but impose tougher terms and conditions and higher penalties.

Bad credit home loans are normally subject to higher interest rates than those for people with a good credit rating. This allows lenders to minimize their risk. It is extremely important that the loan payments be made in full and when they are due; the lender is more likely to start proceedings to seize the property if it is subject to a bad credit home equity loan because of the poor credit history of the borrower.

A home loan can be a good option for those who only intend to borrow one sum during the next few years and want to know exactly how much the monthly repayments will be. If you have been in financial difficulty in the past and do not trust yourself not to be impulsive with your borrowing. Both home loans and lines of credit have their advantages and disadvantages, and advice from a qualified professional is always useful to determine what the best choice is for each individual, particularly those with a bad credit history.

How does it work?

What happens is that the person looking to get the money tells the loan company how much they anticipate making in monthly income. They will in turn use this while doing a credit check. You need a high FICO score to qualify for one of these loans (click here for Fico Scores/Reports). This is because they are already assuming more risk in the first place by giving financing without paperwork. Therefore, to limit it they want people with a good financial background.

How many kinds of home equity loan line of credit financing are there?

There are two. One is SIVA. This is where you do not need proof of income, but you still have to show your assets. This reduces the risk to the loan company a little, and therefore the mortgage interest rate will be lower. If you do not have paperwork for the assets either, you will have to go for what is known as SISA. The interest rates will be higher, but if you do not have the paperwork, this is your only choice.

Does the loan company attempt to verify your income?

Yes they do. First, as mentioned, they look at your FICO score to ensure you have a sound financial past. In addition, they will generally get in touch with the company you work for, to verify you indeed work there, as well as your income.

However, if you work for yourself, they will not just let you off the hook. Often times they will look at your line of work, and then find out the average income for that business. If you state that you are making more than that, they will generally not give you money.

What are the drawbacks of stated income home loans?

Obviously, they might sound like a free pass, because you do not need paperwork. The negative is that the home equity loan rates are higher, as you might expect. This is because the company is taking a bigger risk, because they cannot verify what you are earning. Therefore, make sure to shop around before choosing anyone to find the best home equity loan interest rate.
In conclusion, a stated income home equity loan can be your only choice if you do not have the right paperwork.

The List

Make a list of each of the lenders you have decided to do business with and contact each one. Inquire if their rates are lowest for the day, the week, or the month; then asked about fixed rates and adjustable rates. If they offer adjustable-rate mortgages ask if the loan payment will be reduced when the interest rates go down. Inquire about annual percentage rate and interest rate points. Then ask about broker fees and other such credit charges that you may be required to pay.

Down Payments

Depending on your credit history, you may be able to negotiate a lower down payment. Many lending institutions will require up to 20% of the purchase price. This can be lowered for buyers with great credit. However, remember that a lower down payment will usually equal higher monthly mortgage payments. You can use a mortgage repayment calculator to assess what your monthly payment will be depending on the amount of your down payment.

Home Insurance

Your mortgage insurance can be prorated and included in your monthly mortgage payment. This is another item that can be negotiated from a position of strength. It is best to always keep up with your insurance payments and only have claims when necessary. You can also obtain the best mortgage rates by maintaining a good payment history to your insurance company.

Credit Problems

If you have any negative credit on your report be sure to submit an explanation to the lender or broker. If you can show good cause, they may not penalize you with a higher interest rate. In either case, it is best to inquire about this when you interview prospective lending institutions.

Benefits Of Property Funds

When investing in mutual funds, whether for real estate or another asset class, the investor’s risk is spread across a broad spectrum of companies. Fund managers evaluate and choose the companies their analysis picks as strong values, and hope for steady returns in the long run. Another popular way to minimize real property investment risk is through a REIT fund.

REIT is short for real estate investment trust, and they consist of companies who invest and manage different types of commercial and residential properties, or provide services to the industry. REIT’s have an advantage over direct real estate investment because they are liquid. Like stocks, a trader can purchase REIT funds in one minute and sell them in the next if they desire.

While this is advantageous for the seasoned investor, less knowledgeable people should consider a managed mutual fund. On the other hand, there are several opportunities for reaping profits in this asset class. For example, if the trust owns hotels and occupancy rates go up, the value of the trust can increase as well.

In addition to spreading risk across several investments, REITs have a board of directors that makes decisions, not a single fund manager. Also, real estate investment trusts tend to pay above-average dividends, which is an attractive proposition in today’s market.

Low Start-Up

Another benefit of a mutual fund or real estate investment trust is the low cost of entry. Most property investment funds cost as little as $2,500-3,000 to invest in. In a well-managed fund or trust, steady returns beat out any fees charged for executing trades.

Research First

Before committing your money, investigate the property fund management and their holdings. A real estate fund should have a relatively low turn over rate, and as a result low fees. The history of the fund’s performance may not be indicative of what will happen in the future, but is a strong indicator of how the property fund weathers difficult economic times.

Real estate property funds offer an opportunity for homeowners and non-homeowners to expand their real property portfolios without the burden of finding and managing the properties themselves. Be sure to consult your tax adviser for IRS implications of this investing vehicle.

What is a Remortgage?

A remortgage, also known as a mortgage refinance, is when a homeowner changes the terms on his mortgage. This does not mean that there is a second mortgage or a new property involved in the transaction, it is just changing the original mortgage. It can be done with a new lender or the original lender of the mortgage and usually involves using the funds from a new mortgage to pay off the old one.

Why Would I Do a Remortgage?

It is not for everybody, but there are a few great reasons why a homeowner would do a remortgage. First, you can drastically lower your interest rate. Lowering your interest can lower your housing payment by hundreds of dollars a month depending on the amount of your loan and the difference between the old and new rate. This can save some borrowers tens of thousands of dollars over the course of a thirty year mortgage, and the best remortgage rates are available now! Another reason some homeowners take advantage of a remortgage is to make their payments more affordable. They may lower their interest rate, but they may also change the term of their mortgage. By stretching their mortgage out over a longer period of time the monthly payments will decrease significantly, making their home more affordable.

Is a remortgage right for you?

It is important to run some financial numbers before going through with a remortgage. If you are trying to take advantage of a lower base rate you must compare how much you will save each month to how much you will pay in fees to initiate the new mortgage. For some homeowners, a lower rate will not save them money because they are paying high fees and may not plan on being in their home long enough to take advantage of the lower monthly payments.

Talk to a specialist today to find out if a remortgage is right for you. This is the time to lower your interest rate on your home and to free up some extra cash every month. Just remember that a remortgage is not for everybody, so be sure to do your due diligence before signing the dotted line!