There are some fundamental differences between new home financing and refinancing an existing home.

One thing that comes into play for new home buyers is understanding the first and second mortgage concept.

If you’re purchasing a new home you may have heard the idea of putting down 20%, and that can seem like a lot of money in what was termed to be “the expensive home market”.

One reason 20% is such a talked about down payment amount is because banks and lenders typically only allow first mortgage financing to go up to 80% of the value of the home. (hence the need for knowing the home appraisal value from the outset of your mortgage finance shopping).

Some lenders will go up to 85-90% of the home value on a first mortgage but not without giving a higher interest rate or requiring primary mortgage insurance (PMI) which could end up adding several hundred dollars per month to your mortgage payment.

Of course as I teach all the time, there are three legs that hold up your ability to get home financing. One is your credit score, one is your debt to income ratio and the other is the actual home value established by a certified residential appraiser.

The stronger those three legs (credit, DTI, home value) the more ability you have to get approved for higher total loan amounts in relation to the value of the home.

Typically, you would have an 80% first mortgage and a 20% second mortgage (%’s based on total home value not your interest rate). Interest rates on the second mortgage are higher than the first mortgage simply because the lender is taking more risk on a second lien. Having an 80/20 mortgage helps you avoid mortgage insurance or PMI.

When going with a second mortgage, you will have several choices in terms of a HELOC (home equity line of credit) which has higher rates than a HELOAN (home equity loan) which typically has a fixed interest rate as opposed to a variable. Please see the main menu for more information on second mortgage loan types.

In conclusion, realize that your mortgage interest rate is usually only based on the first 80% of the home value. Don’t make the mistake of calculating your house payment based on the interest rate times 100% of the loan amount. Although not always the case your payment is based on the first mortgage AND the second mortgage combined.

For example, if you have a $300,000 home the financing and payment might look like this;

First Mortgage:
$240,000 (80% of $300,000) X 6% = $1438.92
Second Mortgage:
$60,000 (20% of $300,000) X 8.5% = $461.35

This gives you an idea of what to expect when getting new home financing. Don’t be a stupid home owner by making sure you visit the main menu and bring yourself up to date on the topic specific to your needs.