Silent Second Mortgage

  

Categories: Real Estate, Mortgage

See: Second Mortgage.

It’s a big day for Danny and Sandy: they’re finally ready to buy their first house. They’ve gotten approved for a $400,000 mortgage loan, which is great, but there’s just one itty bitty teensy weensy issue: there is no way they’re going to be able to come up with the $80,000 they need for the down payment on the house. After all, who has eighty grand lying around? Not these two.

Luckily, there's an option by which they can take out an additional loan for the down payment amount. This loan is referred to as a “silent second mortgage.” But before Danny and Sandy get too excited, there are a couple things they should know about these types of loans.

First, they’re called “silent second mortgages” because, historically, these extra loans were taken out without the knowledge of the first lender. This is a big no-no. In fact, it’s more than a no-no; it’s illegal. Why? Because when we get approved for a mortgage, our lender is supposed to know about all additional loans, debt, assets, financial obligations...everything. If we sneak around and get a secret loan to cover our down payment, we’re technically committing mortgage fraud, which means we could end up facing big fines, and even jail time, if we get caught. And that would be...bad.

But there is another way. The term “silent second mortgage” can also refer to a loan-securing practice that is similar, but far less illegal. We’re talking about DPAs, or Down Payment Assistance Programs. These state-supported programs allow homeowners to take out special additional loans specifically designed to help with down payment costs. And while they’re not as “secret” as their illegal cousins—our first lender is totally going to find out about any DPA action we’re involved in—they can make homeownership an achievable dream for folks like Danny and Sandy.

DPA-type silent second mortgages are indeed additional loans, but they usually come with more favorable terms than our loud first mortgage. The interest rate might be lower, and it might not be compounded as often. Also, in many cases, we don’t have to start paying the loan back until we sell the house, which can help make monthly payments easier to manage while we’re in the house. If Danny and Sandy decide to go the (legal) silent second mortgage route, it sounds like they could be enjoying some summer nights in their own backyard in no time.

Related or Semi-related Video

Finance: What are the components of a mo...1 Views

00:00

Finance Allah shmoop What are the components of a mortgage

00:06

payment All right so here's a weird thing about mortgages

00:10

When you borrow say four hundred grand buy a home

00:12

and say in a six percent fixed thirty year interest

00:15

you'll end up paying way more than the four hundred

00:18

grand just in interest Renting the money Think about it

00:22

Well you'll have a monthly pay payment of twenty four

00:25

hundred bucks and by the time you've made thirty times

00:27

twelve per year or three hundred sixty payments you'll have

00:31

paid some four hundred sixty three thousand dollars in interest

00:35

charges Seems like a lot of money to pay out

00:37

of your own pocket But since mortgage interest is usually

00:40

entirely tax deductible well the rial cost to most home

00:43

borrowers is actually meaningful E less than that six percent

00:47

interest maybe something closer to a three and a half

00:49

four percent something like that So while yes on a

00:52

total gross basis you will have paid out more than

00:55

the amount borrowed over the thirty year course in the

00:57

mortgage you'll also have been forgiven loads of taxes And

01:01

for what it's worth over most thirty year time periods

01:03

in history the market has gone up about eight to

01:06

ten percent a year on average Compound did something like

01:09

that So you feel the people mover floor moving fast

01:12

underfoot with inflation pushing things around as you go along

01:16

Well the money you borrow is the principal of the

01:18

loan and that number usually declines by a small amount

01:21

each month As you make a flat payment and it's

01:23

usually gradually paid off Check out what the principal of

01:27

four hundred grand looks like for the first twelve months

01:29

of payments right here Note that the flat monthly payment

01:32

is twenty four hundred dollars and see how the principal

01:35

payed as part of this payment loan thing there goes

01:38

from paydown of three hundred ninety eight dollars Teo Well

01:42

four hundred twenty a year later right Like you're paying

01:45

off principal little by little So you have less that's

01:47

attributed to interest And Mohr that's attributed to principal pay

01:51

down as you go along and note that this assumes

01:54

Ah flat monthly payment here Right You're paying the same

01:57

amount You're one you would You're thirty two thousand three

02:00

hundred ninety eight dollars and twenty cents on this particular

02:03

alone So after a year the amount owed an interest

02:05

is well just slightly last Here in this example it's

02:08

one thousand nine hundred seventy seven bucks down from in

02:11

a two grand and note what it looks like at

02:14

the end of each of the first five years That's

02:17

a big shift from almost entirely interest do now Principal

02:21

being ah meaningful part of it you got after ten

02:23

years right here and then at the halfway point in

02:26

fifteen years it's here So I noticed that the amount

02:28

owed at this point is roughly half the total Why

02:31

Because the lion share the pay down went to interest

02:33

in the first half of the life of the mortgage

02:35

AII those first fifteen years and well then in the

02:38

back half way more will be attributed to a principal

02:41

pay down than to interest Like check out what the

02:43

very last month's payment looks like It's just twelve dollars

02:47

of interest and two thousand three hundred eighty six dollars

02:50

of principle All of this is principal until well then

02:53

the balance is zero and we'll finally Then you will

02:56

have fully paid off your mortgage and own your home

Up Next

Finance: What is a Mortgage?
345 Views

What is a mortgage? A mortgage is a loan on property. Obviously not many individuals, or companies for that matter, can or want to pay cash for the...

Finance: What is Adjustable-Rate Mortgage (ARM)?
17 Views

What is an Adjustable-Rate Mortgage (ARM)? An adjustable-rate mortgage is a mortgage that has a changing interest rate. Whatever it changes to is b...

Finance: What is Interest Only Mortgage?
17 Views

An interest-only mortgage is a mortgage on which you only pay the rent on money borrowed, rather than on the principal.

Find other enlightening terms in Shmoop Finance Genius Bar(f)