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 is Interest Only Mortgage?17 Views
Finance allah shmoop what is an interest only mortgage Well
simply put it's when you only pay the rent on
the dough you borrowed you don't pay down the principal
you owe like if you have a three hundred thousand
dollars mortgage at six percent interest you're paying eighteen grand
a year to rent that money in six percent times
three hundred rands eighteen grand a year But the principal
you borrowed is likely due in thirty years So in
theory anyway if it were a normal mortgage you'd want
to pay down the principal little bit a month as
you go along like averaging ten grand a year in
principle pay down over thirty years That's times ten grand
right three hundred grand their total owning your home at
the end yeah yeah priceless that's what holmes work So
why would you want an interest only mortgage Well for
one thing the monthly payments or less so maybe you
could afford morehouse If on a thirty year three hundred
thousand dollar loan at six percent you're paying interest only
while you're writing a check each month for eighteen thousand
divided by twelve or fifteen hundred bucks maybe that's all
You can afford well the extra five hundred bucks arm
or you'd right toe pay down your principles Just not
something you can really do right now Maybe after three
years of scrimping and saving well you'll be able to
start paying down that principal reducing risk and making life
easier all the way around But right now you can't
afford it so the only thing you can do is
do the interest only dance Well the other reason you
might want an interest only mortgages that interest costs are
tax deductible Principal pay down costs are not so if
in a given mortgage payment of say eighteen hundred bucks
a month where three hundred of it is principal pay
down and fifteen hundred of it is interest well on
ly the fifteen hundred is tax deductible That three hundred
of pay down is not And if you're a forty
percent taxpayer the government is essentially picking up the tax
savings on the fifteen hundred times a forty percent at
six hundred dollars in interest You're paying such that they
quote feel unquote like the fifteen hundred is really only
about nine hundred a month in cost to you the
three hundred bucks and principal paydown feels like a full
three hundred dollars So some people seeking tio optimize their
tax deductions live in the world of interest only mortgages
and let the government for a change You know work 00:02:26.24 --> [endTime] for them How's that feel same all Take it
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