Whatever happened to the constant stream of fixed-rate second loans and home equity lines of credit?

A “second loan” is industry shorthand for two types of loans: the first is a fixed rate second mortgage, and the (ahem) second is a HELOC (home equity line of credit). Fixed rate seconds deliver interest rates that don’t change. HELOC rates behave as a function of the market, and move with fluctuations of the prime rate.

For borrowers bringing less than 20% down to the closing table, second loans used to be just about the only way to obtain financing — other than procuring PMI (Private Mortgage Insurance). In 2007, PERL worked with several dozen banks financing second loans for borrowers with low money down.

As the mortgage crisis continued, banks made fewer second loans — the thinking was that if Bank A foreclosed on a loan in the first lien position, then Bank B’s loan in the second lien position would fall-out as well.

So what’s happening now?

Even though a few lenders are still making fixed rate second loans, HELOC’s are growing in popularity because the prime rate is at such a low level.

And now that PMI is now tax deductible (with certain restrictions) through at least 2010, it’s becoming much more attractive for borrowers requiring additional financing.  PMI can also be lender-financed in some cases for a slightly higher interest rate — and dissolves when a home’s equity reaches 20%.

Standalone lines of credit (smaller loans secured for rehabs, debt repayment or rainy day funds) are still available and much easier to obtain if you’ve secured 20% equity in your home.

For more information on second loans, please enjoy a recent PERL Podcast featuring Barry Schwartz.