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Message # 926 Second mortgages

mp3 #926 How to Get a Second Loan on Your Home (mp3 file)

If you want to take out a "second" on your home, you may have to find a real estate broker called a mortgage loan broker. Banks, savings and loan associations, and insurance companies make few junior loans, that is, loans secured by second mortgages or second deeds of trust, and they do not make marginal first loans. Most of these loans are made by people who use real estate brokers as middle-men by getting together the individual with the money to loan and the borrower who is able to offer his property as security for the loan.

A large majority of these loans and the brokers who negotiate or arrange them are regulated by the Real Property Loan Law. This law is to protect you, the borrower. The law requires that you be given complete information about your loan through a Mortgage Loan Disclosure Statement. Your broker must give you this statement before you take out your loan.

The Mortgage Loan Disclosure Statement contains information about estimated costs, expenses, and commissions that you will have to pay in getting your loan. It will also tell you the approximate amount of money you'll get from the loan after paying commissions, costs, and expenses, payoffs on liens on the property, and other incidental charges. The disclosure statement and other papers necessary for the loan are usually written in English, so if you do not read English, have the information explained to you before you sign it. If there is anything you do not understand in the papers, have it explained to you. Never sign anything you don't understand. No matter how badly you need a loan, consult your attorney if you have any questions about any contracts.

The Real Property Loan Law does not apply to loans secured by first trust deeds when the principal amount is $30,000 or more, or to junior -- that is, second or third trust deeds -- when the principal amount is $20,000 or more. So if you want to borrow amounts larger than these, the broker can charge as much as you agree to pay for commissions, costs and expenses. This means you could net more cash from a smaller loan. Of course, this does not mean that you will automatically have to pay greater charges if the loan is not covered by the Real Property Loan Law, but it is certainly a point you should consider, and get as much information as possible about. Under the Real Property Loan Law, brokers are limited in the amount of commission they may charge. The shorter the term of the loan, the less commission a broker may charge.

Loan brokers are also limited in the amount of costs and expenses they can charge. These costs for arranging the loan -- appraisal fees, escrow fees, notary and investigation fees -- cannot be over 5% of the amount of the loan. If 5% is less than $390, however, the broker can charge you that amount as long as he does not charge more than his actual expenses in getting your loan. No matter how much the loan is, you can't be charged more than $700 for costs and expenses.

Be sure you give correct information when you apply for a loan. If you have given any incorrect information and this prevents your loan from going through, you will be held responsible for the broker's expenses and for payment of half his commission.

You may have to buy extra fire and hazard insurance on your property to protect the money you are borrowing until it is repaid, but no other insurance is required. The mortgage broker can sell this insurance if he is licensed. You don't have to buy it through the loan broker, however. If your property is already insured, you should check into a "loss-payable endorsement" on the policy you already have.

Mortgage loan brokers can't charge or arrange any loan-servicing or collection fee to be paid by you. Do not sign any agreement that asks you to pay such a fee.

You will have to pay a late charge if your loan payment isn't made on time. If you make payment within ten days, there is no late charge. The Real Property Loan Law limits the charge to either $5 or 10% of the principal and interest part of an installment payment, whichever is greater.

You may also have to pay a prepayment penalty if you pay off your loan before it is due, but not if the loan is paid off seven years after it was made. During the seven year period, you may pay up to 20% of the remaining principal balance during any twelve month period without penalty. The prepayment penalty is then limited to six months interest on the amount pre-paid over and above 20%.

Be careful about agreeing to a loan which includes a balloon payment, a final payment more than twice the amount of the smallest installment. A balloon payment is illegal on a loan of six years or less. You will pay more interest on the money you have borrowed with a balloon payment. And if a large amount of money is due, and you can't pay it, you will either have to refinance a new loan or you could even lose your property through foreclosure.

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