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Second Mortgage
Why Take Out a Second Mortgage?
Traditional Second Mortgage
Home Equity Line of Credit (HELOC)
Preparing Your Credit
Preparing to Apply
Understanding Fixed Rates
Understanding Adjustable Rates
Shopping for a Lender
Locking in a Rate
Understanding Points
High-Interest Debt: A Way Out
Paying for College
Home Renovation
Using the Internet to Research
Payment Comparison
An Affordable Monthly Payment
Private Mortgage Insurance
HELOCs and Monthly Payments
The Role of the Loan Officer

Private Mortgage Insurance (PMI), Escrow and Second Mortgages

Consumers who have gone through the process of buying their first home may already be familiar with the concept of private mortgage insurance as a requirement of a first mortgage loan. If a consumer does not have a sufficient down payment, usually 20 percent or greater, their lending institution will often require that they purchase private mortgage insurance as a hedge against the possibility that the consumer will default on the mortgage loan.

Fortunately, if you are in the market for a second mortgage loan, most lenders will not require that you take out private mortgage insurance. This means that the monthly payment you will make on your second mortgage loan may be slightly lower than that required by a first mortgage loan, since it will not include private mortgage insurance.

First mortgages also often include a payment each month that is held in “escrow” to pay taxes and insurance on the property in the event the home owner defaults on the loan. The good news is that, since this provision is usually addressed by the original mortgage, monthly payments for your second mortgage loan will likely not include any monies for escrow. Again, this means your monthly payment decrease.

However, because they are accepting a subordinate claim on your collateral, that is, your home, the lending institution will probably not offer as favorable an interest rate as is available to first time mortgage borrowers.

Keep this fact in mind when comparing rates and shopping for your second mortgage loan. Do not be misled into the thinking you will receive the mortgage rates advertised for original mortgage loans. However, the savings achieved by avoiding some of the expenses of a first mortgage do often somewhat offset the need to pay higher interest rates.