Posted on January 31, 2021
How Do You Know Which Type Of Mortgage Is Best For You?
Your First Mortgage is basically the first loan taken out on a residential property. When the property is first refinanced, usually the new refinanced mortgage retains the first mortgage position as well. The first-mortgage holder has the first right or lien to the property if the borrower defaults. If the first mortgage is not paid, the second mortgage holder has the option to purchase the property at the current rate and resell it or roll the debt into another mortgage.
Lenders have been offering first mortgages for years, but they have become a bit tougher to find lately. Lenders are often leery about approving these loans because of the potential for foreclosure. Therefore, many first mortgages are not refinanced when purchased by the lender. In fact, many first-mortgage lenders will not make first mortgages themselves.
It is common for first mortgage lenders to require that the homeowner own at least 20 percent of the total appraised home equity when approving the loan. This requirement is known as a “use it or lose it” policy. This provision is designed to prevent the homeowner from simply removing the first mortgage and taking the equity out of the home. Most lenders will also require some type of collateral or security to ensure that the loan will be repaid.
Many borrowers mistakenly believe that if they remove the first mortgage, they do not lose their home-equity loan. However, they most certainly do. Once the lender seizes control of the property through a judicial sale or lien process, the borrowers are required to repay the remaining balance on the loan plus the costs of foreclosure. In some states, after the lender sells the property, the borrowers may be required to pay off the first mortgage and retain the lien over the home in addition to the proceeds from the sale.
In a nonrecourse state, a first mortgage holder is generally not required to foreclose on an existing loan. However, if the borrowers fail to pay their liens based on their schedules, they may be subject to foreclosure. In order to avoid foreclosure, homeowners may submit offers to amend the schedules and settle the liens with the lender. The borrowers must follow through with this process until the entire first mortgage has been satisfied.
First mortgages are calculated by a loan-to-value (LTV) ratio. If a loan has a high interest rate and a low appraised value, it will have a high ratio. Conversely, if a loan has a low interest rate and a very high appraised value, it will have a low ratio. Many borrowers mistakenly assume that a high ratio on a home equity loan means that the amount of cash available for borrowing will be limited.
First mortgage lenders are typically involved in the home buying process and provide the necessary financing. Some also have separate lines of credit from which the initial loan can be derived. Homeowners must carefully review all the offers provided by the lenders and select those with the best terms.
Private mortgage insurance (PPMI) provides additional protection to borrowers who obtain loans using first mortgages. PPMI covers missed payments, prepayment penalties and certain fees. For borrowers with excellent credit, many lenders offer no-clause PPMIs. As a result of PPMI, the monthly payment on the first mortgage can be lowered and the overall cost of borrowing can be reduced.
FHA mortgages are government-insured programs that are tailored to help homeowners with lower income obtain home loans that can provide them with equity that can be used for debt consolidation purposes. FHA mortgages do not require borrowers to qualify. Homeowners can apply online by filling out an application. There is no paperwork required. Once approved, borrowers receive a Mortgage Insurance Premium (MIP), which is paid directly from the lender. A borrower may borrow up to an additional mortgage interest rate while he or she maintains his or her FHA loan.
In case of a borrower defaults on his or her first mortgage, the property purchased by the lender becomes subject to lien. Lien is also referred to as foreclosure. In most states, the first mortgage lenders and investors post a lien against the property until the debt is paid off or the property purchased by the borrower sells at a public auction. At this point, the lien is removed from the title and the borrower becomes the new owner.
On the other hand, a second mortgage loan comes with a much higher interest rate than an FHA loan. This interest rate is based on prime interest rates or “PMI,” representing the rate of one percent. Hence, if borrowers choose to get an FHA loan, they may pay PMI and a second mortgage on their own. But when borrowers opt for a second mortgage low, they may pay the PMI on their own without paying for a premium for it. On the contrary, borrowers who get the first mortgage and consolidate their debt into a single loan pay a fee for an FHA loan along with a premium to get an FHA loan and pay a fee for an FHA loan.