- The Washington Times - Friday, April 13, 2001

The next time you're looking at purchasing a house with a low down payment, consider one of the newer multilayered loans available to reduce your monthly payment and increase your buying power.

Lenders have created financial programs to allow the cash-strapped borrower to purchase a house with two loans. The primary lender provides a first-trust loan for 80 percent, then a secondary lender and the buyer's down-payment money takes care of the other 20 percent.

For instance, such a loan structure as described may be referred to as an 80/15/5 loan. The first trust finances 80 percent of the purchase price, the second trust finances 15 percent, and the borrower puts up 5 percent cash.

This strategy increases the purchaser's buying power since the money that would have been spent each month for private mortgage insurance is now part of the payment that goes to principal or interest.

Private mortgage insurance is a policy taken out by a borrower for the benefit of the lender. Statistics show that buyers who take out a home mortgage for more than 80 percent of the value of the home run a higher risk of defaulting on the loan than similar buyers who place a down payment of 20 percent or higher. Because of this higher risk on the lender's part, the company requires the borrower to take out an insurance policy to protect the lender in case the borrower defaults.

For borrowers of loans insured by government agencies such as the Federal Housing Administration (FHA) and Veterans Affairs (VA), this is a common expense on the borrowing side. Many VA loans are for more than 100 percent of the value of the house, since Uncle Sam also allows military veterans to finance closing costs. FHA allows loans up to 97 percent of the value of the house, while other conventional loans are also available for less than a 20 percent down payment, thus requiring private mortgage insurance.

If you're looking at purchasing a house with a second trust, there are a couple of nuances about a second mortgage of which you should be aware.

First, the interest rate is going to seem a bit higher than what you will be quoted for a regular mortgage. For instance, if you're paying 8 percent on the first trust, don't be surprised to see the second-mortgage interest rate in the double digits 10 percent to 15 percent, for instance. Shop and compare, but your primary lender should be able to set up the whole transaction.

The interest rate is going to run higher for at least a couple reasons: The lender-investor stands second in line to get his money if the buyer defaults. In case of a default, the first-trust holder may foreclose to receive payment on the loan the second-mortgage holder doesn't get a cent until the first-trust holder is paid completely. In addition, the amount of the loan is so small that the lender-investor must charge a higher interest rate to receive ample compensation.

Another characteristic of a second trust is that it usually is lent for a much shorter term than the first trust. A typical first-mortgage term is 30 years. A second mortgage could run as long as 15 years or as short as five years.

If you've owned a home for any amount of time, you've received offers for home equity loans. In essence, these are also second trusts. As you make payments on your current mortgage and as your home appreciates in value, your equity in the house will grow, and many homeowners use this equity to finance various projects. Debt consolidation is one of the many reasons a person will borrow money against his equity, to reduce the monthly payment and interest rates of credit cards and other consumer indebtedness.

A home equity loan, however, is different from a home equity credit line. A loan expires after a certain time period, whereas a home equity credit line operates like a cash advance on a credit card. As the homeowner needs the cash, he or she pulls that amount of the home equity and then begins making payments back on a prearranged schedule.

If you need more money to purchase a house or need extra cash for surprise expenses, a second trust can be an easy way to take care of business.

M. Anthony Carr has written about the real estate industry for more than 12 years. Send comments and questions via e-mail ([email protected]).

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