The Complete Guide to Private Mortgages (Part 2)
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[Check out Part 1 here!]
Let’s talk about situations where real estate investors might need a second mortgage.
This is an additional loan taken out on a property that is already mortgaged. You can usually borrow up 80% (sometimes even up to 90%) of the appraised value of your home, minus the balance of your first mortgage. The loan is secured against your home equity. While you are making interest only payments on your second mortgage, you also need to continue to pay off your first mortgage.
If you have good credit and more than 20% equity in your home, the most affordable second mortgage will be in the form of a home equity line of credit. However, if the borrower has bruised credit and/or little equity in their property, a second mortgage through a trust company or private lender would be required.
The Top Reasons to Use a Second Mortgage:
Consolidate Debt: If you are paying 15-30% interest on your credit card balance, a second mortgage can help improve your finances, with lower payments. This in turn can help you back on the path to getting out of debt. This is also an excellent strategy if you are looking to refinance your mortgage with a better interest rate and terms. By paying off high interest credit cards and loans, you increase your credit score, and improve your debt ratios. Within a few months the plan would be to refinance your first mortgage at a higher amount, allowing you to also pay back the more expensive second mortgage.
Renovations: Taking out a loan for home renovations isn’t always easy, as you need access to a large sum of money. A second mortgage allows you to access your home’s equity, and get the necessary work done, like a new Heater Installation, pipe fixing, new flooring, etc. In many cases, you have now increased the value of your home and could then look at refinancing your first mortgage at a higher amount in order to pay out the more expensive second mortgage.
To Buy Another Property: Another popular reason for a second mortgage is to fund the down payment for the purchase of an income or vacation property. Traditional banks usually require a 20% down payment for the purchase of a second home. Therefore borrowing against your primary residence or another rental property is an excellent way to “leverage funds” to buy this new asset.
For Investing Purposes: You know the saying…. “It takes money to make money”. Accessing funds through a second mortgage can often be a great strategy, as long as you also have a strong exit strategy to pay back this more expensive short term loan.
Financing Education: A second mortgage can be used to go back to school. It can also be used to help pay for your kids’ education. Since better education can equate to a better paying job, it could be a great investment.
Real Estate Investors Love Private Mortgages. The benefits of using private funds are numerous, but let us just focus on the top 8 reasons why real estate investors prefer Private Mortgages when building their portfolio.
Application Process Is Easy: Getting approval for a private mortgage requires a lot less paperwork than a conventional mortgage loan. These loans can be approved in a matter of days, as opposed to weeks for some financial institutions.
Pulling Equity from Other Projects: You have more flexibility when dealing with private lenders. You are able to take money from an existing property to use in another property without having to go through a long, drawn-out process. These funds can be used as the down payment on a new purchase, or the renovation on an existing property.
Obtaining Funds Faster: When an application is approved, it typically can take only days before the mortgage is fully funded. This helps the investor to appeal to the needs of the seller who is looking for a fast closing.
Putting Yourself In A Better Negotiating Position: When you are able to offer the seller a cash offer with a quick closing, this can give the buyer more negotiating power for the price.
Cash Deals Have Benefits: When you are able to offer a seller cash for a property, there are many benefits. Cash offers are more favorable, and typically do not get turned down. You can often also get a discount on the asking price. It provides more flexibility to purchase more properties and finish more projects. This is very helpful when flipping homes for profit.
No Need For Perfect Credit Scores: Private mortgages come with fewer stipulations than bank financed mortgages. The private lender is more concerned about the property, the ability pay back the loan and the ability to make your monthly payments.
Source of Financing When Conventional Mortgages Are Tapped Out: Suddenly you can find that your ability to grow your real estate business is hampered by the fact that your financing options have been cut off. Private mortgage lenders do not typically have those limits, simply because they are focused on financing the property, not the person. Even though a private mortgage is more expensive , it allows you to continue to grow you portfolio without limits.
Private Mortgages Are Made For FixNFlip & BRRRR Strategy: Private lenders acknowledge the benefits when lending to real estate investors who are well versed in buying properties that need renovations when purchasing. Often they will lend on the ARV (after repair value) and offer very desirable terms, because they recognize that these savvy investors will be an ongoing source of repeat business.
In order to quality for a private mortgage, lenders will be looking at: equity, ability to service the loan, credit score and most importantly, the property. This is the most critical factor for a private mortgage lender.The property is the security used to assure the lender that he or she will get their money back if you stopped paying your mortgage payment. They will consider the LTV (loan to value), the location of the property (rural vs. urban), and the marketability of the property.
For more information, please visit PrivateMoney4Mortgages.com