There are many different paths to consider on your journey to home ownership. Mortgage loans may be the most commonly discussed way to finance a home, but sometimes a unique situation calls for a different approach. If you have considered traditional loan options and can't find one that will help you purchase a home, subordinate financing may give you new choices.
Subordinate financing is the act of financing a second debt that works to pay an amount not covered by your primary mortgage. This second loan is subordinate to the primary loan which means it will be paid only after the primary loan is satisfied. For this reason, the interest rate on a subordinate loan is likely to be higher than that of a primary mortgage loan.
Most home loans are approved with an agreement that the buyer will make a 20% down payment. While it is common for lenders to work out a lower down payment, other restrictions often apply. If you only have a portion of the necessary down payment available, a subordinate loan would pay the additional cost needed to buy the home.
Pros and Cons of Subordinate Financing
Subordinate financing can help a homebuyer who wouldn't otherwise have the funds to complete a home purchase. However, this option may have unanticipated consequences that will make it difficult for you to keep your payments up to date. It's important to consider all of the factors related to subordinate loans before making this important decision.
- You have the ability to make a down payment when you don't have cash on hand.
- Two loans may help you get a lower interest rate if you are borrowing a significant amount of money.
- If you'll be in a position to pay off the subordinate loan early, you'll be left with a smaller interest rate of the primary loan.
- You can avoid private mortgage insurance (PMI) usually associated with paying less than 20% down.
- You can deduct the interest you're paying on both loans at tax time.
- You will be making two mortgage payments each month.
- The interest is usually higher on a subordinate loan.
- You may have difficulty refinancing until you pay off the subordinate loan.
Is Subordinate Financing the Right Choice for Me?
After weighing your options, it still may be confusing to decide whether you are a good candidate for subordinate financing. Two loans are a big responsibility. Since a subordinate loan is considered secondary to the original loan, the interest will likely be higher in an effort to help protect the lender if you default on the loan.
The biggest deciding factor in your choice to use subordinate financing may be the ability to save you money over time. If you have good credit and need to borrow a significant amount of money, subordinate financing may be cheaper than paying the interest of a jumbo loan. Additionally, if you're in a situation to pay off the smaller loan quickly, the higher interest rate won't pose as much difficulty in the future. Subordinate financing can give you the opportunity to buy a home when you don't have time to save for a down payment. If you're confident that your income will cover both payments, a subordinate loan could help you avoid letting your dream home slip through your fingertips.
A professional loan officer can determine your eligibility for a subordinate mortgage. First Savings Mortgage loan officers specialize in residential lending. This expertise allows them to assess your financial and personal situation to assist you in making an expert lending decision that will help you reach your dreams of homeownership. Contact us today to speak with a professional loan officer about subordinate financing or to answer your questions about home loans.