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First time ever: Standalone fixed-rate second mortgages allow 100% cash-out


By Jeff Lazerson



What I think: You might be smugly sitting on a very low fixed-rate mortgage. That is, at least if you’ve financed or refinanced in the past six years. Maybe you’ve been thinking about pulling out some cash for that home improvement project, doing some debt consolidation, finding down payment funds for your child or maybe you aspire to purchase a rental.

A home equity line of credit might be too nerve-racking. After all, Wall Street Prime Rate stands at 5 percent today. Conventional wisdom says the Federal Reserve will raise rates twice more this year, one-quarter point each time. And, three times next year. This means, soon enough, the prime rate could be at 6.25 percent.

The way HELOCs work, the lender adds a margin or profit margin to the base prime rate for starters, even if you get an under-market teaser rate to start. For example, your HELOC could start at prime plus one or more. Your HELOC may have an 18 percent rate cap. Yikes for sure!

Knock me over with a feather! A 100 percent, cash-out, fixed-rate second mortgage is the rage — for this first time ever! This means you can pull every penny of equity out by adding a fixed-rate second mortgage. In my experience, competitively priced standalone cash-out HELOCs, as well as fixed-rate seconds, typically go to a max cash-out of about 75-80 percent of the property value. And, that’s with conservative appraising.

The reason an investor might take on this riskier loan-to-value is the investor can charge a higher rate and require tougher underwriting

This aggressive program has a wide rate range. Depending on your credit score and your combined loan-to-value (total of your first and second mortgages), your fixed rate will run as low as a hair over 6 percent to as much as almost 10.4 percent. You must have at least a 720 middle FICO score to receive the 100 percent cash-out loan.

You are good to go on a single-family residence, condo or townhouse, manufactured home on a permanent foundation, two to four units and second homes. No investment properties.

You can borrow as little as $40,000 or as much as $250,000.

Your fully amortized payment choices are as follows; five, 10, 15, 20, 25 or a 30-year period.

Proof of income is required. Recent and major derogatory credit and any mortgage late in the last 24 months are not acceptable.

Say you’re buying a single-family home with equity from your primary residence. This loan option allows up to a 95 percent combined loan-to-value. For example, you can knock a more expensive jumbo rate (anything over $679,650 in Orange and Los Angeles counties and anything over $453,100 in Riverside and San Bernardino counties) down to a Fannie Mae rate. Here’s how that works:

Let’s say you are buying an $800,000 Orange County home and plan on putting 10 percent down, settling on a jumbo loan amount of $720,000. Instead, take a first with Fannie (that will go up to $679,650) and this second-mortgage program (oftentimes referred to as a piggy-back) for $40,350. Fannie pricing will likely be better than a jumbo and your second lien will allow you to avoid paying mortgage insurance (that may also be non-deductible). Even with the higher rate on the small-sized second, you will likely save more in both interest rate and real payment dollars on the first mortgage by bringing the first loan balance down.

You can also use this combined with a new first mortgage to avoid mortgage insurance or get rid of mortgage insurance in the event of a refinance.

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Jeff Lazerson - Mortgage Columnist since 2011