What is a Mortgage?
A mortgage is any loan that is placed in a position of lien on a title of property.

What is a First Mortgage?
A first mortgage is any lien that is placed on the title of a property in the first position. Typically when you first purchase a home you take out a mortgage. This is your first mortgage not because it is the first loan you took out on the house, but is now in the first lien position on your title.

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What Types of First Mortgages are Available?
A. Conventional Loans
These are loans for people who have excellent credit.

Advantages:

  • These loans have the lowest rates of almost all first mortgages

  • Special programs are available to people who want to put only 3 percent down to purchase a home; however, the purchase must be the buyer's first home

  • In many cases, individuals purchase homes under this program for 5 percent down

  • Private Mortgage Insurance can be dropped after the Borrower can demonstrate that they have anywhere from 20 to 25 percent of the equity in the home

Disadvantages:

  • These loans require that the Borrowers have assets in some type of verifiable account

  • Private Mortgage Insurance is charged when you take out a loan and have less than 20 percent of the equity in the home

B. FHA Loans
These are loans that are backed by the Federal Government.

Advantages:

  • Typically individuals use FHA loans for purchasing property with only 3 percent down

  • FHA loans have credit guidelines that are more lenient than normal conforming loans, and the rates are typically the same

Disadvantages:

  • FHA loans require Mortgage Insurance Premium that is 2.25 percent of the loan amount on every loan. This amount is financed over and above the loan amount. However, if you refinance out of an FHA loan with seven years then you are entitled to a pro-rated refund of the Mortgage Insurance Premium

  • The property must meet certain minimum property standards as designated by FHA

  • Along with the up front Mortgage Insurance Premium you are also charged Mortgage Insurance Premium on a monthly basis as well. This monthly amount is charged for the life of the loan

C. Non-Conforming Loans
These are loans for individuals who have less than perfect credit, or who are looking for a loan that does not fit the regular guidelines that are required for a conventional or FHA loan.

Advantages:

  • Allows you to obtain a loan if you do not fit into conventional or FHA guidelines

  • Takes individuals who are in a unique situation into consideration

  • Customizes loans for people who have credit issues

Disadvantages:

  • Rates tend to be higher than conventional or conforming rates

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What is a Second Mortgage?
Second mortgages are called second mortgages because they are placed in the second position on your title. Second Mortgages always have higher rates than first mortgages. Home equity loans and home equity lines of credit are both types of second mortgages.

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What Types of Second Mortgages are Available?
A. Lines of Credit
Lines of credit are almost always second mortgages. Lines of credit offer the flexibility of using the money available when you deem necessary, and not being billed unless funds are utilized from the line. Many people use lines of credit for home improvement. For example, if you have a $60,000 line of credit and you initially pay off $20,000 in credit cards, then you are billed only on the initial $20,000 that you utilize. You then have $40,000 available. If you have a bathroom redone six months later and it costs $5,000, then you can write a check for $5,000 and then you are billed now for $25,000 and you still have $35,000 available if you need it.

Advantages:

  • Offers the flexibility of not being billed unless you utilize the funds available

  • The interest, in most circumstances, is tax deductible

Disadvantages:

  • You are typically billed in interest only payments

  • The rate is tied to a certain index (Prime is used the most often). The rate will always be fixed as prime plus a certain percentage. Therefore, if the index goes up, your rate goes up, and if the index goes down, the rate goes down

B. Home Equity Loans
Typically these loans are used to consolidate credit cards and other types of debt, in addition to obtaining cash. These loans are second mortgages, and have a fixed monthly payment that will never change.

Advantages:

  • Monthly payment and interest rate is fixed and does not change

  • The interest, in most circumstances, is tax deductible

  • If you are paying off credit cards you only have to make one monthly payment instead of several

Disadvantages:

  • If interest rates go down, your rate remains the same

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What are Some Other Types of Loans?
A. 125 Percent Loans
One Hundred and Twenty Five Percent loans are a type of second mortgage. These loans allow you to borrow up to 125 percent of your home's value. For example, if your home is worth $100,000 and the balance on your first mortgage is $90,000 then you can get a loan for $35,000. With a normal second mortgage you would only be able to obtain $10,000. These loans are available only for individuals with excellent credit.

B. No Income or Stated Income Loans
These are loans for people who have difficulty verifying their income. Some programs are available in which income is just stated on the application and will not be verified, and in other programs some of the income can be verified, but not all.

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