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A second mortgage is a mortgage whose terms are subordinate to the first mortgage. Loans with a second mortgage are usually done when the homeowner needs money in order to pay for an existing loan.

Second Mortgage or Refinance?

This is a question every homebuyer is faced with when shopping for mortgages. Take this scenario: A homeowner is facing a credit card debt of 50,000. Should he take a 190,000 second mortgage to refinance an existing mortgage with a balance of 140,000? Or should he borrow the money from a 50,000 home equity loan?

In most cases, borrowers who took a mortgage when rates were lower will find a second mortgage better than a home equity loan. But to be certain, some factors need to be considered.

You need to compare the interest rate and points of the first mortgage with that of a second mortgage. Second, find out if there are any PMIs (Private Mortgage Insurance) involved with the second mortgage. Find out what loan term is most favorable for you on your second mortgage. Your income tax bracket and amount of cash you need from your second mortgage are also necessary factors.

Consider the case above. If the first mortgage at 14,000 was acquired two years ago, the interest rate would be 7 percent for 30 years without PMI. Lets say your income bracket is 39.6% (the highest) and you are capable of earning 5% more on your investments. Your house is now worth 213,000.

A second mortgage for 190,000 with settlement costs will require PMI. If you decide to get a home equity loan instead, you will get 30 years loan term at 8.25% and one point. For 50,000, your second mortgage will include additional costs for 15 years at 11.5% and one point. The result will be that over the course of five years, your second mortgage will have saved you 11,361 more than what refinancing will.

Take a second mortgage or get a new one and pay PMI?

Getting a second mortgage has more advantages when it comes to taxes than a separate loan. But usually, this depends on many other factors.

Getting a second mortgage is better than getting a separate loan when the rate difference between the second mortgage and the first mortgage is small. If the loan term is short, then getting a second mortgage probably makes more sense than getting a separate loan. Balance is paid off faster with shorter term loans. Since second mortgages have considerably higher rates, the shorter the loan term is, the better it is to get a second mortgage loan.

Other factors that affect the advantage of second mortgages over separate mortgages are tax brackets, closing costs, and expected appreciation rate.

For example, you have a tax bracket of 15% and a 30-year first mortgage for 160,000 and a second mortgage for 20,000 at 11.75%, zero points, and to be paid off in 15 years. A separate mortgage would be for 180,000 with down payment at 10%. Interest rate for this separate mortgage would be at 8.25%, zero points, and 0.52% PMI.

When you calculate this, you can see that over the five years, a second mortgage will have saved you 16.97% more than a separate mortgage would.

Every person who has ever bought a home with a mortgage knows that by the time the pay off is made on the mortgage more is paid to cover interest costs than the actual purchase price of the house.

For example, on your first mortgage loan, you borrow 125,000 at 8% with a 30-year term. After your first mortgage loan period is done, youll have paid over 205,000 in interest and the 125,000 principal amount you borrowed. A result, your house that is only for 125,000 ends up costing you 330,000 on your first mortgage loan.

This is the reason why, it makes absolute sense that before taking on your first mortgage loan, a little bit of shopping is done. Getting the best product for your first mortgage loan is nice and most probably the biggest financial decision youll ever have to make.

All right. So lets get down to the basics. Most people think that a mortgage is a loan. Well, its not. A loan is something the lender gives you. A mortgage, on the other hand, is something you give to the lender.

Now when you take on your first mortgage loan, its imperative that you know what types of mortgage products are currently being offered in the market. Below are some of these first mortgage loans.

Fixed Rate for your first mortgage loan

If youre thinking of getting your first mortgage loan, a fixed rate mortgage might be the right choice for you. In a fixed rate mortgage, interest rates are set all throughout the whole loan term. This means that when you take on your first mortgage loan, your interest rate will not increase or decrease. The interest rate of your first mortgage loan will remain the same all throughout the loan period, usually 30, 20, 15, or even 10 years.

Getting a fixed rate first mortgage loan will have you paying for a predetermined monthly payment rate. Payments for your first mortgage loan interest and principal will never change. Having this type of mortgage for your first mortgage loan is especially advantageous if over time, interest rates suddenly go up. Plus, down payment if you get this as your first mortgage loan could be as low as 5% of the original purchasing price.

Adjustable Rate First Mortgage Loan

If the projected interest rates in the market are going down, then an adjustable rate mortgage might just be the right option for getting your first mortgage loan. Adjustable rate mortgages are mortgages where the interest rates and monthly payments depend on the rise and fall of rates in the market. This type of loan is especially a good choice for a first mortgage loan also if you expect a rise in your income over the next few years.

Balloon First Mortgage Loan

If you do not plan on keeping your house for long, then getting a balloon first mortgage loan will do the trick for you. A balloon first mortgage loan offers lower interest rates compared to a conventional loan. The only downside to this type of mortgage for a first mortgage loan is that a large amount is due in five to seven years. If you do not have funds to cover that amount and you are still in the house by the end of the loan term, you might need to get another loan in order to cover the cost for that first mortgage loan.

The price of homes is steadily climbing. In order to buy a home, borrowers are turning increasingly to 100-percent financing and home loans where mortgage insurance is not part of the deal.

The 80 20 mortgage loan is one such loan. With an 80 20 mortgage loan, the home buyer actually takes out two loans. The first part of an 80 20 mortgage loan is for 80 percent of the purchase price. At the second part of an 80 20 mortgage loan is for 20 percent of the homes price. The closing costs of an 80 20 mortgage loan are something that the buyer is expected to come up.

According to Anthony Hsieh, president of HomeLoanCenter.com, an 80 20 mortgage loan allows people to buy without a down payment. An 80 20 mortgage loan is also for people who would rather leave their savings alone in buying a house.

Most people who take on an 80 20 mortgage loans are usually young professionals. Hsieh further describe that these are people who have gotten out of college and have good jobs. An 80 20 mortgage loan is for people who have good credit but do not have a lot of savings to their name in order to afford down payments of most homes.

80 20 Mortgage Loans for Renters

80 20 mortgage loans are also targeted to those people who are renters or renting apartments. These types of people can afford monthly rents, the costs of which are roughly about the same as the cost of a home. Because their rent costs are a cycle, at the end of their monthly bills, these people do not have enough funds saved to be able to afford a down payment.

These people may be able to borrow money on loan programs where little or no down payment is required. But to do so, they would have to provide a private mortgage insurance or PMI. If you want to avoid PMI, you can take an 80 20 mortgage loan.

With an 80 20 mortgage loan, you get a piggyback loan or second mortgage loan that is used to back up the first mortgage. The first mortgage is comprised of 80 percent of the homes price. The second loan is only for 20 percent minus the down payment.

80 20 Mortgage Loans Second Mortgage spells higher rates

In most cases, the interest rate of the second loan of an 80 20 mortgage loan is higher that first. However, if you combine the two payments in an 80 20 mortgage loan, you get lower costs.

You can see evidence of this just by comparing the cost of an 80 20 mortgage loan with the cost of a regular loan with PMI. The 80 20 mortgage loan usually costs less each month.

80 20 mortgage loans are structured by lenders in several ways. Some lending companies structure their 80 20 mortgage loan with the first loan having a 5/1 ARM payment. This means that the 80 20 mortgage loan has a fixed rate for the first five years. However after the initial five years, the payment for the 80 20 mortgage loan interest rates is adjusted annually.

Others structure their 80 20 mortgage loans in a slight different way. 80 20 mortgage loans have the 20 percent piggyback dependent on the prime rate. The 80 percent of the 80 20 mortgage loan can be a fixed rate, adjustable, or interest-only.