When the seller of a property makes a mortgage loan to the buyer, it is called a purchase-money mortgage. Usually, the seller “takes back” a second mortgage to facilitate the sale when a buyer cannot meet the amount required for the down payment and closing costs. Purchase-money mortgages often are made in conjunction with an assumed first mortgage. Typically, a seller loans you money at a better rate than a traditional lender.
Home Equity Lines of Credit (HELOCs) and Debt Consolidation Loans
Consumer borrowing through credit cards, installment loans, and personal loans is at an all-time high. Many consumers are saddled with tens of thousands of dollars of debt on credit cards with interest rates of 18 percent or more. A whole new class of second mortgage loans and mortgage lenders has appeared to help consumers get out from under their credit card debt. These loans have interest rates that are much higher than traditional first mortgages but are usually much lower than interest rates charged on credit cards.
There are no standard loan types for these second mortgage products. Some are like credit card debt and in fact can be accessed with credit cards or checks. Others are fixed-rate, amortizing loans and balloon loans. Many lenders now lend up to 125 to 135 percent of a home's value. An LTV ratio of 125 percent is unheard of in traditional mortgage lending.
The only common feature among these loans is that they all are secured by a lien on the borrower's home. Unlike credit card debt, if the borrower fails to repay these loans, the lender can foreclose on the borrower's home.
Most consumers who need a high-rate debt-consolidation loan should seek financial advice from a qualified financial advisor or from one of the many nonprofit or government consumer counseling services (call 800-388-CCCS for a counseling agency near you).
One of the enduring benefits of home ownership is the federal tax deduction for interest and real estate taxes. On a home with a $100,000 mortgage, the deductions total about $8,000 per year, and depending on your tax bracket, they can reduce your federal taxes by $1,200 to $3,200. This amount decreases as you pay down the
FIGURE 6.8 Tax Deductible Interest and Points, First Year, 8-Percent Mortgage
loan or, if you have an ARM loan, may go up in the event your interest rate increases.
The Tax Reform Acts of 1990 and 1993 changed the rules governing the deductibility of interest, and the regulations are particularly complicated when you purchase a home or refinance your mortgage. The Internal Revenue Service's Publication 936, Home Mortgage Interest Deduction (2005), describes when and if interest, fees, points, and other charges relating to your mortgage are deductible. The rules for home purchase are different from refinancing, and the rules for FHA/VA loans are different from conventional loans. Consult with an accountant, tax attorney, or an IRS advisor for the proper way to file your taxes, especially for the year that you get a new mortgage. (See Figure 6.8.)