Need Multiple Mortgages? Here's How Many You Can Have
Second and third mortgages are not uncommon. In fact, you'd be surprised how many people actually carry multiple mortgages. There are various reasons for doing so including using a second mortgage to pay off high-interest debts or using the funds to purchase an investment property.
The number of mortgages you can have is limited to your ability to secure funding for them. In other words, there is no exact “limit”. However, Fannie Mae, the Federal National Mortgage Association, raised the number of mortgages you can have from 4 to 10 in 2009. This does not include private funding.
In this post, we’ll explain how many mortgages you can have, some of the most common reasons for having them, and the qualifications needed to secure multiple mortgages.
Reasons for Having Multiple Mortgages at Once
Many scenarios can lead to the need to have more than one mortgage. A mortgage is an agreement between a lender, such as a bank or other creditor, and an owner. The money is lent with interest in exchange for the property's title. The borrower pays a predetermined amount to be paid monthly.
When it comes to your residential property or your primary residence, certain circumstances call for a second mortgage. This is a lien, or a right to seize and actually take possession of a property, that is taken out against a property that you own. This property already has another loan on it. It should be noted that when you take out this lien, the lender has the ability to take possession of the property in the event that you default on the second mortgage. This lien is usually borrowed against the percentage of the house which you have already paid off thus far.
What is enticing about second mortgages is that interest rates are usually fairly low and can be utilized for pretty much anything. They can even be used to pay down credit card debt.
This second mortgage on your primary residence will be based on the current value that your home equity has. It is important to keep in mind that if you owe anything on your home, you technically do not own it in full. Your mortgage lender will be the owner of the property until the loan is paid off completely. The more that you pay, the more you own. The balance that you have paid off so far in the term is your equity in the property.
You will need to determine how much equity is in your home, and this is not difficult! To do so, just subtract the full amount that you have already paid toward the amount you owe on your house from the total amount that you borrowed through your mortgage.
It is essential to note that your equity that you may currently have in your property is an asset. However, unlike more liquid assets, it is not something that is readily available to be utilized.
Taking out that second mortgage will provide the opportunity to utilize your home's equity. It frees the equity and allows it to no longer be tied up in your house.
Also, the mortgage lender typically only lets you take out a specific piece of the equity, not the full amount. It will be based on the value of your home and the remaining mortgage balance on the first mortgage.
Many often get confused between a refinance and a second mortgage. It is crucial to know the difference because they are two very different things. Upon taking out a second mortgage, you tack on another expense to your monthly payments.
When you refinance the home, you wind up paying off your first loan and get a brand new lender with a different set of loan terms. Obviously, in this case, your first loan is paid and you will still be only carrying the one mortgage.
When a mortgage lender proceeds and refinances a mortgage, they will take the lien on your property as collateral if you default on the loan. Mortgage lenders who take on a second mortgage do not have this to fall back on.
Types of Second Mortgages
There are two types of second mortgages: a home equity loan or a home equity line of credit. While they sound the same, they are not. A home equity loan will allow you to take out a certain dollar amount from your equity. It will be provided to you by the mortgage lender in cash. The lender, in exchange, will get that second lien on your property.
Home equity lines of credit do not give out cash in one single lump-sum. It works more like a line of credit. The mortgage lender will approve the loan based upon the amount of equity that you currently have in the property. From there, you will borrow against the credit that the mortgage company offers you. A home equity line of credit works like a revolving balance, meaning you can use the credit line over and over, barring that you pay it back each time.
What is a Package Mortgage?
If you've ever heard of the term “package mortgage”, you might be wondering what exactly that might be. In brief, a package mortgage is a loan in which not only the primary residence is included in the mortgage, but also any assets that come with the home. For example, this could be a washer and dryer or various other items sold with the home. These items are also used as collateral for the mortgage meaning if you default on the loan, these items will also be repossessed by the lender.
Multiple Mortgages and Investment Properties
For those who invest in real estate, it is the norm to carry a few mortgages at once. Investing in real estate involves one purchasing, owning, and/ or managing real estate for a profit. Investing in multiple properties is not easy, but certainly reaps rewards if done correctly. Owning multiple properties is profitable, and financial independence, of course, is the ultimate goal. However, along the way, loans will most likely be necessary to accomplish this.
Going bigger and expanding your number of real estate properties will come with its own set of challenges, but is doable, even if your bank will not finance multiple properties at once. Taking on more renters, which generates more income, will require financing if you do not have the cash to support that many properties. Below, different options are discussed.
Investment Property Financing Options
There are many options for multiple mortgages when investing in properties. Some are easier to obtain than others, and some will require a lot of verification and leg work. Keep in mind that Fannie Mae and Freddie Mac both offer financing. Fannie Mae has a 5-10 properties program that can be useful to you if you meet the criteria. Freddie Mac has a specific Investment Property Mortgage program in which you can finance six one-to-four unit properties along with your primary residence property.
Blanket mortgages are commonly used to finance investment properties for several reasons discussed below.
What is a Blanket Mortgage?
A blanket mortgage is essentially a liquid financial product that is utilized to financially back the purchase of more than one properties. When it comes to purchasing commercial purchases, blanket mortgages are fairly common. When a building developer sets out to purchase more than one real estate property. Instead of taking out one mortgage for each piece of property, a blanket mortgage allows you to only take out one. The real estate properties are the collateral for the loan.
Benefits of Blanket Mortgages
A benefit to a blanket mortgage is that you will only be responsible for one payment on all of the properties. Your term for the blanket mortgage depends on a few factors and will vary. It should be mentioned that the blanket loan can be utilized to buy tracts of land that you plan to develop. A blanket loan can be beneficial to any company with more than one location, a property flipper, or an investor in real estate.
A big benefit of taking out a blanket mortgage is that is usually accompanied by a release clause. This means that you, as the borrower, can sell a piece of real estate and will not need to use your profit to put towards your loan. Instead, you can use the money to buy and then turn and develop more property.
A portfolio loan is essentially a mortgage in which the lender will originate and hang onto it instead of putting it out onto the market for secondary mortgages. Due to the fact that a portfolio loan is shown on the lender’s “books”, the lender determines the rules. A portfolio loan is a good option for you if you may have some problems qualifying for another type. A portfolio loan is usually an “in-house” loan and has flexibility. However, they typically carry a slightly higher interest rate than other conventional loan types.
Hard Money Lenders
A hard money loan is a type of loan that uses real property to secure it. They are typically the last option many people consider or are used as a short-term bridge loan. The lender in a hard money loan is usually an actual person, not a business, company, or bank. Therefore, they are typically used to generate cash quickly and the funding time is also fairly short. A huge benefit of a hard money loan is that they can be negotiated, but the property is usually always still the collateral in the loan.
Qualifications and Requirements for Receiving Multiple Mortgages
For primary residences, to carry a second mortgage, the mortgage lender will be requiring a credit score no lower than roughly 620. Sometimes, this bottom number can be higher. The better your credit score, the lower your rate will be. The debt-to-income ratio will also be taken into account. Lenders usually like to see this lower than 43%.
For investment property additional mortgages, usually the magic number of mortgages one can have is four. This will require very good credit and a pretty hefty down payment. They will want your loan-to-value amount to be around 80%.
Is Having Multiple Mortgages at One Time a Good Idea?
If your situation allows for it, carrying more than one mortgage can be a fantastic idea for a few reasons. On a primary residence, taking out that second mortgage will open up many opportunities for you to pay down debt that is high-interest, or to renovate the property.
In terms of investing, multiple mortgages allows for easy funding of more than one property instead of carrying separate loans for each property if you choose that route. When investing in real estate, until you become liquid enough to be able to buy the properties cash, the multiple mortgages will be necessary and beneficial to you.
There are many options and routes you can explore when looking for loans for additional properties or a second lien on your current residence. Your current financial situation and credit score will dictate much of what is available to you. Be sure to do your research. Being informed is key to your decision!
When considering multiple mortgages, some people might opt to invest their money instead. You can check out these reasons to payoff your mortgage instead of investing.
Conclusion: How Many Mortgages Can You Have?
Whether you're looking to invest in real estate or pay off high-interest debts, having access to multiple mortgages can be salient on your financial journey.
The number of “public” mortgages you can have is limited by Fannie Mae to a total of 10. However, securing this number of mortgages can be extremely challenging. By utilizing private lenders, you can increase the number of mortgages you have.
Have you taken advantage of multiple mortgages? Comment your experience below!