Secret Weapon Second's: Bob Eakin

Secret Weapon Second’s

By Bob Eakin, JCAP Private Lending

Second mortgages have long been used to get borrowers cash quickly when they have real estate to use as collateral. In this article we'll go through exactly what a second is, good examples of when it should be used, the benefits to a broker, and some things to look out for.

A second mortgage is a loan that uses real estate as collateral while there is another loan secured by that real estate. People use these loans for all types of business ventures and home renovation. So we ask "what do you do when your client needs more cash-out"? A straight refi perhaps would come to mind but they may not need the cash long-term. A good option could be a 2nd on an existing investment property. You get paid for booking another loan and your client gets the cash to invest in other properties or cash for their business. Your client may be able to get up to 65% LTV on a stated income 2nd's program or up to 80% with traditional blanket. If you cross collateralize or do a “blanket loan” the LTV is still the same.

One of the benefits of a second mortgage is that it allows your client to borrow significant amounts. Because the loan is secured by real estate, they have access to more than they could get without using real estate as collateral. How much can be borrowed? It depends on your lender, but you might expect to borrow up to 80% of the home’s value on a full doc loan and up to 65% on a stated income loan. That maximum would count all of your home loans, including first and second mortgages.

Good 2nd’s scenarios:

• If your borrower wants to sell their property but has been advised to make improvements on the business to make it more profitable before selling so they need a short-term loan.

• If your borrower is growing their business and needs cash quickly to invest in their business.

• If your borrower needs cash fast to invest in another property.

Second mortgages often have lower interest rates than other types of debt. Again, securing the loan with real estate helps because it reduces the risk for the lender. Unlike unsecured personal loans such as credit cards, second mortgage interest rates are commonly lower and may be tax deductible (check with your CPA).

In some cases, there will be a tax deduction for interest paid on a second mortgage. There are numerous technicalities to be aware of, so advise your borrower to talk to a tax preparer before they start taking deductions. For tax years after 2017, the Tax Cuts and Jobs Act eliminates the deduction unless you use the money for “substantial improvements” to a home. This maybe different for a business purpose loan (consult your CPA).

Benefits always come with tradeoffs. The costs and risks mean that these loans should be used wisely. One of the biggest things to note with a second mortgage is that your borrower will need to put their investment property on the line.If they stop making payments, the lender will be able to take the home through foreclosure. For that reason, it rarely makes sense to use a second mortgage for “current consumption”costs. For entertainment and regular living expenses, it’s just not sustainable or worth the risk to use a home equity loan. 2nd’s for business purposes are the best fit.

Second mortgages, like the purchase loan, can be expensive. The borrower will need to pay various costs for things like credit checks, appraisals, origination fees, and more. Closing costs can add up and it’s a good rule of thumb to let the borrower know of all up-front costs from the get-go. Second mortgage rates are typically lower than credit card interest rates, but they’re often higher than the first loan’s rate. This is because second mortgage lenders take more risk than the lender who made the first loan.

Also, make sure to be aware of risky loan features. Most loans do not have these problems, but it’s worth keeping an eye out for them: balloon payments that could cause problems down the road and prepayment penalties that wipe out the benefits of paying off your debt early.

Most lending companies don’t do second mortgages because there’s a greater risk in losing the mortgage to a lender because the 1st’s ability to foreclose. Many brokers don’t typically consider 2nd’s as an option for their clients just because of the low volume of companies offering this type of loan, however, 2nd’s area perfect solution for clients who need short-term loans but who do not want to disrupt their low interest rate 1st.

Brokers who have advised their borrowers to use 2nd’s for business purposes have had happy customers that turn into repeat customers and that’s why we call them “Secret Weapon Seconds”.

ABOUT THE AUTHOR:

Bob Eakin is the CEO of JCAP Private Lending based in Newport Beach. JCAP offers short-term, low loan-to-value real estate loans (including Construction Loans and Stated Income 2nd’s) offering safe, high-yield investments for their investors, while quickly solving a short-term problem for loan clients. They are committed to bringing unparalleled professionalism and service to their community.

CONTACT: bob@jcap.net