If you're among the tens of thousands of homeowners thinking about refinancing this summer, don't neglect one of the most dramatically improved capital-raising tools available to you: the new breed of cut-rate second mortgages and deeds of trust.
Depending upon your objective in refinancing, you might do significantly better by taking out a "second" on your house rather than shedding your existing home loan.
There are two key reasons: First, there's the sobering cost of refinancing, which can total 3 or more percent of your existing loan balance. That cost may not be worth the trouble, particularly if you may be moving within the next few years.
And second, there's been a little-publicized transformation in the shape, size and rate structures of second mortgages and deeds of trust during the past two years. What was once a high-risk, high-cost, unregulated backwater of real estate finance has become a highly competitive, national marketplace with rates, terms and loan vehicles comparable to those in the first-mortgage arena.
Second mortgages and trusts are loans secured by the borrower's home real estate, but with a so-called "junior" lien status. In the event of foreclosure, the lender who made the first mortgage would be paid from the sale proceeds before the lender who provided the second. Home equity-secured second loans are available in all major American markets, except in Texas.
Although many homeowners still assume that "taking out a second" means high rates and quick paybacks, the reality is refreshingly different.
Consider this array of loan options turned up by a lenders' survey last week in just one metropolitan market. Consumers could pick and choose from no less than 36 different second-mortgage packages including:
*Loans of from $5,000 to $250,000 carrying fixed rates at or under 11 percent.
*Adjustable-rate seconds, tied to The Wall Street Journal's composite prime lending rate, which is currently 9 1/2 percent. Some adjustables are pegged 1 to 2 points above prime (10 1/2 to 11 1/2 percent) and are readjusted every six or 12 months.
*The full range of consumer-protection features that made adjustable first mortgages reasonable options for home buyers can now be found on seconds offered by national lenders. Annual rate-increase "caps" or ceilings and life-of-the-loan rate limits offer borrowers guarantees that they'll never have to pay more than a set amount per month, no matter what happens to rates in the economy overall.
*Exceptionally high "loan-to-value" ratios are now possible with seconds. These ratios are sometimes more attractive than what's available in the market for first loans. Second mortgages traditionally have been written to require the borrower to have at least a 20 percent equity in the property. That is, the amount of the existing first mortgage plus the second could total no more than 80 percent of the appraised valuation of the house. Some lenders, however, now are allowing the first and second to total 95 percent of the home value -- the same 5-percent-down terms they'll permit on conventional new-home financing.
*Low or no "points" up front on the transactions offer special attractions this summer. Although most second-mortgage lenders, like first-mortgage lenders, want 1 or 2 percentage points of the loan amount in cash at closing as an origination fee, some national lenders now offer "no-point" deals on seconds.
For example, Manufacturers Hanover Financial Services, a national mortgage banking firm, last week quoted a "prime-plus-two" (11 1/2 percent) on long-term seconds up to $250,000 -- a deal one loan officer conceded was directly aimed at the "refinance" market.
"Who would pay 3 points to refinance an entire mortgage," she asked, "when they can step into an 11 1/2 percent loan with no points, no hidden surprises, and a payment plan offering a 25-year amortization option?"
None of this is to suggest that second mortgages or deeds of trust are the preferred route for everyone thinking about refinancing this season. Owners burdened with high-rate first mortgages dating back to the early 1980s, for instance, need to shed them entirely -- not borrow additionally. They need a 12 percent fixed-rate replacement loan, or a lower-rate adjustable first mortgage, provided they can recoup the out-of-pocket costs of switching loans over the coming two to three years.
But owners whose primary objective in considering a refinancing is to raise capital should take a hard look at the new breed of seconds. As long as short-term rates -- as reflected by the prime -- remain low, taking a second could be your logical first choice.