engaged a client,
you can determine
if a new cash-out
first mortgage or
a second mortgage
will suit their
All of the previously mentioned underwriting factors are important,
and commercial mortgage brokers should think of them from a
common-sense point of view of a junior lender. Will the junior lender
be able to pay the loan balance of the first mortgage, plus property
taxes and insurance, for an undetermined number of months in the
event the senior lender had to file a notice of default to recoup its
investment because the borrower stopped making payments?
To locate prospective clients and determine whether a second
mortgage is in their best interest, reach out to real estate investors,
commercial-property owners, small- and medium-size business
owners, or just about anyone else who is locked into a strong first
mortgage and has a need for cash for business or investment purposes. Once you’ve engaged a client, you can determine if a new
cash-out first mortgage or a second mortgage will suit their needs.
Occupancy plays an important role in determining whether a private
lender will approve a second mortgage. Typically, a private lender
prefers to lend primarily for business purposes. In the case of bona
fide business-purpose loans, a lender also may consider making loans
secured by your borrower’s primary residence. You should be careful
and use common sense in making this determination because the
two loans will have different compliance guidelines.
A self-employed general contractor taking out a $200,000 loan to
buy their third fix-and-flip property of the year, for example, makes
sense to qualify as a business-purpose loan, but a $200,000 loan to
a teacher for their at-home, after-school tutoring business does not
make sense. The intent or purpose of a cash-out loan is important in
today’s highly regulated lending environment.
Do the math
Once you have copies of a borrower’s first-mortgage note and state-
ment, figure out the interest rate and monthly payment amount
that goes toward interest. Next, determine the interest rate and the
monthly interest payment for the second mortgage. Add the interest
payments together, multiply by 12 (months of the year) and divide
by the combined principal amount of the existing first mortgage and
the new second mortgage to arrive at the blended interest rate.
You can use the blended interest rate calculation as an effective
tool when comparing the costs, interest rates and payment amounts
for a cash-out refinance of the borrower’s first mortgage, versus
keeping their existing first mortgage intact and adding a second
mortgage. Cost is one of the most important factors a borrower
considers when they are taking cash out of a property they own. But
what is the true cost of the money they are borrowing?
In the case of a second mortgage, the cost is typically much lower
than a cash-out refinance of a first mortgage. This is mainly because of
the size of the loans: Second mortgages typically cost 1 percent to
2 percent of the loan balance more than a refinanced first mortgage,
but because second mortgages usually carry a smaller principal balance,
the overall cost can be much lower. The interest rates are generally
higher than those of first mortgages, but the same concept applies
when you look at the smaller principal balance of the second loan.
n n n
There are many people looking to turn equity into liquidity.
Private-money second mortgages are one of the best ways to accomplish this goal under current market conditions. Small-balance
second mortgages can create opportunities for larger deals for
commercial mortgage brokers and now is the time to take advantage
of these products. n
Miles Farquhar is president and portfolio manager
of SC Financial Service, a private lending company
based in San Clemente, California. Reach Farquhar
at (949) 295-8335 or firstname.lastname@example.org.
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