Aggregators: Government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac, are aggregators that purchase mortgages from lenders and repackage them into mortgage-backed securities to be sold on the secondary market.
The secondary mortgage market is the market for the sale of securities or bonds collateralized by the value of mortgage loans.
Risk of foreclosure
This is one of the biggest risks of second mortgages. With a second mortgage, you're using your home as collateral. That means if you don't make your payments, your lender can foreclose on your house to pay off the balance.
Higher Interest Rates
Second mortgages usually have higher interest rates than first mortgages. This is because lenders see them as riskier. The higher the risk, the higher the rate. These increased rates mean higher monthly payments for borrowers.
The secondary mortgage market benefits homebuyers in many ways, including: Keeping mortgage rates lower. Enabling interest rates for mortgage loans to be similar across the country, in good times and bad. Making mortgage loans with longer terms, such as 15 and 30 years, available to borrowers.
By default, taking a second mortgage won't hurt your credit score. In fact, if you borrow a second mortgage and stick with the payment terms and conditions, it will boost your credit score in the long run. Some of the things that can hurt your credit score include: Making late payments.
On your primary mortgage, you might be able to put as little as 5% down, depending on your credit score and other factors. On a second home, however, you will likely need to put down at least 10%.
If you take out a $50,000 home equity loan, you will receive all of the money at once and pay interest on the full amount. With a HELOC, you can withdraw money whenever you need it.
Qualifying for a second mortgage with bad credit is challenging, especially since lenders set a high bar for these inherently riskier loans to begin with: Many expect your FICO score to be at a minimum “good” (670) or high “fair” (640-669). Still, qualifying is possible, especially if you have a sizable equity stake.
HELOANs and HELOCs are sometimes referred to as second mortgages. Because your home is used as collateral, they tend to have lower interest rates than personal loans or credit cards.
Jumbo loans, portfolio loans and other non-conforming loans are considered higher-risk loans and are generally not sold on the secondary market. As a result, most lenders prefer to offer conventional or conforming loans to borrowers.
What could be a consequence if there were no secondary mortgage market? Lenders might not have funds available to make new loans to the public. The secondary mortgage market buys loans from the primary market.
By selling off the loans they provide, lenders can obtain the cash they need to make additional loans. Investors also benefit from the secondary mortgage market by gaining access to a relatively safe investment that produces interest income.
A second loan, or mortgage, against your house will either be a home equity loan, which is a lump-sum loan with a fixed term and rate, or a HELOC, which features variable rates and continuing access to funds.
The major players in the secondary market include stock exchanges, broker-dealers, institutional investors, retail investors, market makers, and clearinghouses.
Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $372 for an interest-only payment, or $448 for a principle-and-interest payment.
On the downside, HELOCs have variable interest rates, so your repayments will increase if rates rise. Another risk: A HELOC uses your home as collateral, so if you don't repay what you borrow, the lender could foreclose on it.
A good way to remember the documentation you'll need is to remember the 2-2-2 rule: 2 years of W-2s. 2 years of tax returns (federal and state) Your two most recent pay stubs.
Con: Special Attention and Maintenance
As the owner, you will either need to pay for a landlord to take care of your house, or you will need to roll up your sleeves and do it yourself.
Although most second-mortgage lenders state that they don't charge closing costs, the borrower still must pay closing costs in some way—the cost is included in the total price of taking out a second loan on a home.
Credit Score And Financial Requirements
To be approved for a second mortgage, you'll likely need a credit score of at least 620, though individual lender requirements may be higher. Plus, remember that higher scores correlate with better rates.
Understand why you were denied
Frequently, it is tougher to get a second mortgage than a primary mortgage. While HELOC rejection rates are the lowest in four years, about half of applications are still denied, for example.