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Second Mortgage Financing
Facts for Consumers from the Federal Trade Commission
Second Mortgage Financing -- October 1992
If you are like most homeowners, you probably have a first
mortgage loan on your home. Typically, such loans are for 25 to
30 years, with the monthly payments adjusted so that the loan is
paid in full at the end of the term.
As you make monthly mortgage payments and the value of the home
increases, your interest in the property (called "equity") grows.
After a while, some homeowners may wish to borrow against the
equity in their home to get cash, to make home improvements, to
educate their children, or to consolidate personal debts.
Because such loans are in addition to the first mortgage on the
home, they are commonly called "second mortgage" loans.
Second mortgage loans are different from first mortgages in
several ways. They often carry a higher interest rate, and they
usually are for a shorter time, 15 years or less. In addition,
they may require a large single payment at the end of the term,
commonly known as a balloon payment.
Traditionally, second mortgage loans are offered with a fixed
loan amount and a predetermined repayment schedule. Some lenders
now offer lines of credit that allow you to obtain cash advances
with a credit card or to write checks up to a certain credit
limit. These often are called "home equity lines" because the
equity in your home is collateral for the amount of credit you
request. As you pay off the outstanding balance, you can reuse
the line of credit during the loan period.
This brochure provides answers to some common questions people
ask when they begin shopping for a second mortgage or home equity
loan. It discusses choosing a lender, the meaning of some
mortgage terms, costs, disclosure documents, and contacts for
resolving problems.
How do I Choose a Lender?
When you are looking for a lender, shop around and make
comparisons. Interest rates, repayment terms, and origination
fees may vary substantially. Ask your local banks, savings and
loans, credit unions, or finance companies about their loan
terms. Although you will want to select the lender who offers you
terms most suited to your needs, be sure to ask and compare the
annual percentage rates (APR) because they will give you the
total cost of the loan, including financing charges.
If you have not done business with the lender before, or if the
lender is unfamiliar to you, you may wish to ask your local
Better Business Bureau or consumer protection office if they have
any complaints against the lender.
How Long Will I Have to Repay the Loan?
Some second mortgage loans may extend for as long as 15 or 20
years; others may require repayment in one year. You will need to
discuss the repayment terms with the lenders and select one who
offers terms that best suit your needs. For example, if you need
to borrow $20,000 to make repairs on your home, you may not want
a loan that requires you to repay the entire amount in one or two
years because the monthly payments may be too high.
Will My Interest Rate Change?
If you have a fixed-rate loan, the interest rate is set for the
life of the loan. However, many lenders offer variable rate
mortgages, also known as adjustable rate mortgages or ARMs.
These provide for periodic interest-rate adjustments. If your
loan contract allows the lender to adjust or change the interest
rate, be sure you understand when the lender has the right to
change the interest rate, whether there are any limits on how
much the interest or payments can change, and how often the
lender can change the rate. You also should know what basis the
lender will use to determine a new rate of interest.
How Much Will My Monthly Payments Be and Will They Pay Off the
Loan?
Be sure you understand how much your monthly payments will be and
what they cover. Your lender should be able to give you this
information in advance. With some loans, you will be required to
make monthly payments on the principal and interest. With other
loans, you may be required to pay interest only on the borrowed
amount; in these loans, your monthly payments will not reduce the
principal amount of the loan. With such a loan, you will be
required to pay back the entire borrowed amount at the end of the
loan period. These loans are popularly known as "balloon loans."
If your loan has a balloon payment, you should consider how you
will arrange to repay the entire amount when it becomes due.
On "home equity lines," the lender does not have to give you the
exact amount of the monthly payment, but must explain how it is
figured. This is because the borrowed amount will vary and your
outstanding balance will change if you use the line of credit.
However, if your monthly payment term is 5% of the outstanding
balance and your outstanding balance is $5,000, your minimum
monthly payments would be $250.
Will I Have to Pay Any Fees to Get This Loan?
Many companies will charge a fee for lending you money. The fee
is usually a percentage of the loan and is sometimes referred to
as "points." One point is equal to one percent of the amount you
borrow. For example, if you were to borrow $10,000 with a fee of
eight points, you would pay $800 in "points." The number of
points lenders charge varies, so it may be worthwhile to shop
around. If the fee seems too high, you may be able to bargain for
or find a lower fee. Be sure to get the amount of the fee in
writing before you take the loan. Many states limit the amount of
fees a lender may charge on a second mortgage loan. You may want
to check with your state's consumer protection office or banking
commissioner to determine whether there is a limit in your state.
What Should I Get in Writing?
If your loan is primarily for personal, family, or household
purposes, the lender is required to give you a federal Truth in
Lending disclosure form before you sign the customary loan
documents, such as a note or deed of trust. This Truth in Lending
form will tell you the actual cost of the loan. It includes the
annual percentage rate, the finance charge, and the fees included
in the loan. For "home equity lines," your lender also is
required to send you a periodic statement, usually monthly.
The lender also is required to give you a notice of your right of
rescission. The right of rescission gives you three business days
after signing for the loan and receiving the Truth in Lending Act
disclosures to reconsider whether you want to take the loan. For
additional information about the right of rescission, ask for the
free FTC brochure, Getting a Loan: Your Home as Security, at the
address listed at the end of this brochure.
If your lender makes any promises, such as saying you can
"automatically" get the loan refinanced at the end of the term,
be sure your lender puts these promises in writing. In this way,
you may avoid any future disputes.
What Should I Do if I Have a Problem?
If you ever have a problem making your loan payments, talk to
your lender as soon as possible. Some lenders will work with you
to arrange a temporary payment plan. Also, call the lender if you
have any questions about your loan.
However, if you have problems with your lender, you may want to
contact your state, county, or local consumer protection office.
If they cannot help you, they can refer you to the office that
can.
The Federal Trade Commission is responsible for enforcing laws
such as the Truth in Lending Act, the Equal Credit Opportunity
Act, the Fair Credit Reporting Act, and the Fair Debt Collection
Practices Act. It also provides free brochures explaining these
laws. For these or credit-related publications, such as: Home
Equity Credit Lines, Using Ads to Shop for Home Financing, and
Refinancing Your Home, write to: Public Reference, Federal Trade
Commission, Washington, D.C. 20580.
If you believe your lender may be violating a law that the FTC
administers, you can send complaints or questions to:
Correspondence Branch, Federal Trade Commission, Washington, D.C.
20580. Although the FTC cannot resolve individual consumer
disputes, it can take action if there is evidence of a pattern of
deceptive or unfair practices.
8/86
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