Financing with two mortgages: a thing of the past?
I doubt it. I researched it a bit when I was shopping for a HELOC, and found no bank giving HELOC for more than 80% LTV. In fact, most required less than 80%. Banks are more cautious now. If the bank is not willing to compromise on the LTV for the first mortgage - either look for another bank, or another place to buy. I personally would not consider buying something I cannot put at least 20% downpayment on. It means that such a purchase is beyond means. "There are a few of ways to do this: Ask the seller if they will hold a Vendor Take-Back Mortgage or VTB. They essentially hold a second mortgage on the property for a shorter amortization (1 - 5 years) with a higher interest rate than the bank-held mortgage. The upside for the seller is he makes a little money on the second mortgage. The downsides for the seller are that he doesn't get the entire purchase price of the property up-front, and that if the buyer goes bankrupt, the vendor will be second in line behind the bank to get any money from the property when it's sold for amounts owing. Look for a seller that is willing to put together a lease-to-own deal. The buyer and seller agree to a purchase price set 5 years in the future. A monthly rent is calculated such that paying it for 5 years equals a 20% down payment. At the 5 year mark you decide if you want to buy or not. If you do not, the deal is nulled. If you do, the rent you paid is counted as the down payment for the property and the sale moves forward. Find a private lender for the down payment. This is known as a ""hard money"" lender for a reason: they know you can't get it anywhere else. Expect to pay higher rates than a VTB. Ask your mortgage broker and your real estate agent about these options." Depends on where we are in the credit cycle. When banks are scared like in 07 to 11, good luck.  Now (13), they'll probably start begging you.  There are more regulations that prevent it now, but they'll probably be eased as they usually are during good times. If the banks won't help you, private investors might.  Just find your local mortgage investor club. "You can't get a HELOC, to the best of my knowledge, without actually ""owning"" the house. If you get an 80% mortgage (of the purchase price - not the appraised value, btw), you still need 20% as a down payment. Once you own the home, you can apply for a HELOC ... presuming you have enough equity (eg, the purchase price is $40k less than the appraised value). We haven't looked at the norm, at least where I live, of 5% down for a traditional mortgage and 3.5% for an FHA (which your question touches on). If you can do 5% down, on a $1,000,000 mortgage you need $50,000 on the day of closing. If the home is worth (ie appraises for) $1,250,000, you're getting 20% of the house ""for free"". Presuming the bank(s) will go for it, you could likely then open a HELOC for as much as $250,000 (again, depending on individual lender rules). tl;dr: If you don't have the money ready on the day of signing (via seasoning, if it is a loan/gift, or because you have been saving), you cannot afford the house. To clarify from comments with the OP, I am in no way speaking to the buyer's ability to afford the monthly payments - this is only about affording the initial costs associated with the home buying process (down payment, closing, whatever else the bank(s) require, etc)."
The loan agent surely knows that having a combination of loans greater than the value of the property (less some margin) is illegal, but also impossible.  Your first mortgage, mechanic's liens, tax liens, and so forth are a matter of public record.  In most states the records can be viewed online, by anyone, for free. The title search prerequisite for getting the second mortgage looks beyond the low hanging fruit for things like aborigines claims for parcels of land that include your property.  The loan agent is trying to sell you a home equity line of credit. Almost everyone gets one after building up some equity.  There's often no closing cost and it's not necessary to ever use it.  Keep it for emergencies. "Care to elaborate? It is my understanding that any asset can be rehypothecated at least in theory. By saying these car loans ""aren't"" rehypo'd, do you mean this is not the practice, or that there is a law/regulation prohibiting it?" "Your question isn't great, but I will attempt to answer this piece as it seems really the root of your personal finance question: I want to convince my wife to make this move because it will save us   at least 800 month, but she fails to see how buying a second home is   financially sound because we have to lose our savings and we have to   pay interest on our second home. And... Her logic is it will take almost 5 years to get back our down payment   and we have to pay interest as well. So how can this move help our   family financially in the long run? ... Is she right? She is mostly wrong. First, consider that there is no ""ROI"" really on your down payment. Assuming you are paying what your home would sell for the next day, then your ""RIO"" is already yours (minus realtor fees). She is talking about cash on hand, not ROI. I will use an example without taking into account risk of home markets going down or other risks to ownership. Example: Let's say you pay $2800 a month in mortgage interest+principle at 5.5% apr and $200 a month in taxes+insurance on a $360k loan ($400k house). In this example let's say the same house if you were to rent it is $3800 a month. Understand the Opportunity Cost of renting (the marginal amount it costs you to NOT buy). So far, your opportunity cost is $800 a month. The principle of your house will be increasing with each payment. In our example, it's about $400 for the first payment, and will increase with each payment made while decreasing the interest payment (Suggest you look at an amortization table for your specific mortgage example). So, you're real number is now $1200 a month opportunity cost. Consider also the fact that the $400 a month is sitting in a savings account of sorts. While most savings accounts give you less than 1% in returns and then charge taxes on that gain, your home may (or may not be) much higher than that and won't charge you taxes on the gains when you sell it (If you live in it for a period of time as defined by the IRS.) Let's assume a conservative long term appreciation rate of 3%. That's $12k a year on a $400k house. So, now you're at $2200 a month opportunity cost. In this example I didn't touch on your tax savings of ownership. I also didn't touch on the maintenance cost of ownership or the maintenance cost of renting (your deposit + other fees) which all should be considered. You may have other costs involved in renting. For instance: The cost of not being able to fully utilize your rental as your own house. This may be an even simpler and more convincing way to explain it: On the $2800 mortgage example, you will be paying around $19k in interest and $2400 on taxes, insurance = $23k per year (number could be way different in your example). That is basically throw away money you're never getting back. On the rental, 100% of your rent at $3800 a month is throw away money you're never getting back. That's $45,600 a year." What you are describing is called a Home Equity Line of Credit (HELOC). While the strategy you are describing is not impossible it would raise the amount of debt in your name and reduce your borrowing potential. A recent HELOC used to finance the down payment on a second property risks sending a signal of bad financial position to credit analysts and may further reduce your chances to obtain the credit approval. The problem is that when the mortgages were securitized they did it in such a way as to make checking them impossible. The security wasn't based on one mortgage or even dozens of them, but hundreds of them. Good and bad, all mixed together.  Making matters worse, each security wasn't even dealing with whole mortgages, just fragments of them.  It was a true nightmare. "With the scenario that you laid out (ie. 5% and 10% loans), it makes no sense at all. The problem is, when you're in trouble the rates are never 5% or 10%. Getting behind on credit cards sucks and is really hard to recover from. The problem with multiple accounts is that as the banks tack on fees and raise your interest rate to the default rate (usually 30%) when you give them any excuse (late payment, over the limit, etc). The banks will also cut your credit lines as you make payments, making it more likely that you will bump over the limit and be back in ""default"" status. One payment, even at a slightly higher rate is preferable when you're deep in the hole because you can actually pay enough to hit principal. If you have assets like a house, you'll get a much better rate as well. In a scenario where you're paying 22-25% interest, your minimum payment will be $150-200 a month, and that is mostly interest and penalty. ""One big loan"" will usually result in a smaller payment, and you don't end up in a situation where the banks are jockeying for position so they get paid first. The danger of consolidation is that you'll stop triggering defaults and keep making your payments, so your credit score will improve. Then the vultures will start circling and offering you more credit cards. EDIT: Mea Culpa.  I wrote this based on experiences of close friends whom I've helped out over the years, not realizing how the law changed in 2009.  Back around 2004, a single late payment would trigger universal default on most cards, jacking all rates up to 30% and slashing credit lines, resulting in over the limit and other fees. Credit card banks generally apply payments (in order, to interest on penalties, penalties, interest on principal, principal) in a way that makes it very difficult to pay down principal for people deep in debt. They would also offer ""payment plans"" to entice you to pay Bank B vs. Bank A, which would trigger overlimit fees from Bank A. Another change is that minimum payments were generally 2% of statement balance, which often didn't cover the monthly finance charge. The new law changed that, resulting in a payment of 1% of balance + accrued interest. Under the old regime, consolidation made it less likely that various circumstances would trigger default, and gave the struggling debtor one throat to choke. With the new rules, there are definitely a smaller number of scenarios where consolidation actually makes sense." As pointed out in a comment, it would be more natural to get a regular mortgage on the second house, which is essentially using the second house as collateral for its own loan.  If you are to use the first house, either mortgage it or get a home equity line of credit on it and use that money to buy the second house. The relative merits of the options may depend in part on where you live, whether or not you live in the homes, and the relative cost of the two properties.  For example, in the US, first and second homes get preferred tax treatment in addition to rates that are typically better than commercial loans (including mortgages for investment properties).  If you're going to get a better rate and pay less taxes on one option and not on the others, that's definitely something to weigh. For Option 2 - do you really think you can guarantee an average return of 8% here. Historical returns are no guarantee of future returns.  Even if you could get higher returns for option 2 than the interest rate on the mortgage, are you able to cover all the additional fees with the PMI in placing such a low down payment? The wiser choice in my opinion would be to chose option 1. As the other answers suggest, there are a number of ways of going about it and the correct one will be dependent on your situation (amount of equity in your current house, cashflow primarily, amount of time between purchase and sale). If you have a fair amount of equity (for example, $50K mortgage remaining on a house valued at $300K), I'll propose an option that's similar to bridge financing: Place an offer on your new house. Use some of your equity as part of the down payment (eg, $130K). Use some more of your equity as a cash buffer to allow you pay two mortgages in between the purchase and the sale (eg, $30K). The way this would be executed is that your existing mortgage would be discharged and replaced with larger mortgage. The proceeds of that mortgage would be split between the down payment and cash as you desire. Between the closing of your purchase and the closing of your sale, you'll be paying two mortgages and you'll be responsible for two properties. Not fun, but your cash buffer is there to sustain you through this. When the sale of your new home closes, you'll be breaking the mortgage on that house. When you get the proceeds of the sale, it would be a good time to use any lump sum/prepayment privileges you have on the mortgage of the new house.  You'll be paying legal fees for each transaction and penalties for each mortgage you break. However, the interest rates will be lower than bridge financing. For this reason, this approach will likely be cheaper than bridge financing only if the time between the closing of the two deals is fairly long (eg, at least 6 months), and the penalties for breaking mortgages are reasonable (eg, 3 months interest). You would need the help of a good mortgage broker and a good lawyer, but you would also have to do your own due diligence - remember that brokers receive a commission for each mortgage they sell. If you won't have any problems selling your current house quickly, bridge financing is likely a better deal. If you need to hold on to it for a while because you need to fix things up or it will be harder to sell, you can consider this approach. You have the 2 properties, and even though the value of property B is less than the amount you owe on it hopefully you have some equity in propery A. So if you do have enough equity in property A, why don't you just go to the one lender and get both property A and B refinanced under the same mortgage. This way hopefully the combined equity in both properties would be enough to cover the full amount of the loan, and you have the opportunity to refinance at favourable rate and terms. Sounds like you are in the USA with an interest rate of 3.25%, I am in Australia and my mortgage rates are currently between 6.3% to 6.6%. Two reasons are typically cited (I've heard these from Dave Ramsey): So I wouldn't refinance to a 15-year loan just for item 2, but would definitely look at it for the better interest rates. "Several people here have highlighted the incentive/agency problems that tend to naturally arise when securitizing mortgages. However, the market for mortgage-backed securities has existed for decades, and during most of that time these agency problems were held in check. Moreover, academics knew about this problem even before the credit crisis and actually *recommended* the use of trenching in order to avoid the moral hazard problems associated with securitization (see DeMarzo 2005).  So, to give a compelling historical explanation for why the crisis happened *when* it did, you need to explain what changed in the mortgage securitization market to enable these previously unproblematic agency relationships to breakdown.  So what changed? In short, the growth of the market for CDOs (collateralized debt obligations) composed of mortgage-backed securities), and not the MBS market itself. This market grew so rapidly in the mid-2000s because the ratings agencies created an opportunity for banks to take low-rated MBS debt and give it a higher rating by merely repackaging it into a CDO. It was ratings arbitrage, through and through. Explanations that place the brunt of the blame on the GSAs (i.e. Fannie and Freddie) cannot adequately explain why the majority of mortgage-related losses during the credit crisis were concentrated in CDOs of MBSs, and not in the vanilla MBS market.  Here's what happened. Back in the day -- say, pre-early 2000s -- the agency/incentive problems that naturally arise in mortgage securitization were held in check by careful institutional investors who would rigorously assess the default risk of the higher-risk MBS tranches. They had a deep knowledge of the mortgage business. Sometimes they would even go so far as manually examining the loan documentation, the profile of the borrowers, the quality of the collateral, and so on. There were a lot of indiscriminating buyers who were happy to purchase the AAA and AA tranches, but they could afford to be indiscriminating because the banks who were securitizing MBSs knew that without selling to the discriminating buyers of higher-risk debt, they wouldn't be able to break even.   It worked a bit like a market for fine wines. I don't know much about wine, but when I walk into a shop that sells fine wines, I can be reasonably certain that there will be a reasonably strong relationship between price and the quality of the wine. Basically, I get to free-ride off the superior discrimination of the wine connoisseurs who regularly visit the shop.  Once the ratings agencies created the now infamous ""ratings arbitrage"" between the MBS and CDO markets, the market for CDOs on MBSs expanded. As this market grew, these ""discriminating"" buyers became a proportionally smaller part of the MBS market. The folks building CDOs of MBSs didn't know very much about the mortgage business itself; instead, they tended to rely on statistical default models provided by the ratings agencies that predicted the probability of mortgage default based on quantitative variables such as borrowers' credit scores, loan-to-value ratios, etc.   The problem is that these models used historical data that was collected back when the ""discriminating"" institutional investors kept the agency problems in the MBS market in check. The growth of the CDO market spurred even more mortgage securitization, which led lending standards to deteriorate because firms like Countrywide knew that the CDO buyers only cared about credit scores, LTV ratios, etc. However, undiscriminating buyers of MBS were unable to detect these changes in default risk because the models they were using to ""see"" those changes were becoming invalidated by the growth of the CDO market itself  If you want to read more about this, I'd highly recommend MacKenzie's 2011 paper in the American Journal of Sociology [see here]( http://www.sps.ed.ac.uk/__data/assets/pdf_file/0019/36082/CrisisRevised.pdf). It's a detailed historical account of the changes in valuation practices/models used within the MBS and CDO markets, and how these practices became invalidated as the CDO market grew in size.  **TL;DR: the credit ratings created a ""ratings arbitrage"" that the banks took advantage of. They are as much, if not more, at fault as the GSAs.**  For more info on the deterioration in mortgage quality in the mid-2000s, check out:   Keys, Benjamin, Tanmoy Mukherjee, Amit Seru, and Vikrant Vig. 2008. Did Securitization Lead to Lax Screening? Evidence from Subprime Loans.  Rajan, Uday, Amit Seru, and Vikrant Vig. 2008. “The Failure of Models That Predict Failure: Distance, Incentives and Defaults.” SSRN eLibrary (December). http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1296982.  Also, the citation I mentioned above:  DeMarzo, P. (2005) ""The pooling and tranching of securities: a model of informed intermediation"" Review of Economic Studies, 18(1):1-35, 2005" To littleadv's comment, walking away may be the best option. If your numbers are as described, any ideas we could offer on earning or raising cash would be best to use as money to live on, not to pay down a loan on an under water house. the double wide you propose to buy will like cost less than your HELOC balance.  I'd see if you could buy that home first, renting the house, and only default after you're in the new place. "This is the meat of your potato question. The rephrasing of the question to a lending/real estate executive such as myself, I'd ask, what's the scenario? ""I would say you're looking for an Owner Occupied, Super Jumbo Loan with 20% Down or $360K down on the purchase price, $1.8 mil purchase price, Loan Amount is ~$1.45 mil. Fico is strong (assumption). If this is your scenario, please see image. Yellow is important, more debt increases your backend-DTI which is not good for the deal. As long as it's less than 35%, you're okay.  Can someone do this loan, the short answer is yes. It's smart that you want to keep more cash on hand. Which is understandable, if the price of the property declines, you've lost your shirt and your down payment, then it will take close to 10 years to recover your down. Consider that you are buying at a peak in real estate prices. Prices can't go up more than they are now. Consider that properties peaked in 2006, cooled in 2007, and crashed in 2008. Properties declined for more than 25-45% in 2008; regardless of your reasons of not wanting to come to the full 40% down, it's a bit smarter to hold on to cash for other investments purposes. Just incase a recession does hit.  In the end, if you do the deal-You'll pay more in points, a higher rate compared to the 40% down scenario, the origination fee would increase slightly but you'll keep your money on hand to invest elsewhere, perhaps some units that can help with the cashflow of your home. I've highlighted in yellow what the most important factors that will be affected on a lower down payment. If your debt is low or zero, and income is as high as the scenario, with a fico score of at least 680, you can do the deal all day long. These deals are not uncommon in today's market. Rate will vary. Don't pay attention to the rate, the rate will fluctuate based on many variables, but it's a high figure to give you an idea on total cost and monthly payment for qualification purposes, also to look at the DTI requirement for cash/debt.  See Image below:" The rules of thumb are there for a reason. In this case, they reflect good banking and common sense by the buyer. When we bought our house 15 years ago it cost 2.5 times our salary and we put 20% down, putting the mortgage at exactly 2X our income. My wife thought we were stretching ourselves, getting too big a house compared to our income. You are proposing buying a house valued at 7X your income. Granted, rates have dropped in these 15 years, so pushing 3X may be okay, the 26% rule still needs to be followed. You are proposing to put nearly 75% of your income to the mortgage? Right? The regular payment plus the 25K/yr saved to pay that interest free loan? Wow.  You are over reaching by double, unless the rental market is so tight that you can actually rent two rooms out to cover over half the mortgage.  Consider talking to a friendly local banker, he (or she) will likely give you the same advice we are. These ratios don't change too much by country, interest rate and mortgages aren't that different. I wish you well, welcome to SE.