We we choose to do a first and second mortgage to avoid PMI my broker told me the 1st loan can have a fixed rate but the 2nd loan has to be a variable rate. Is this true. I wish that we could have both at fixed interest rates.

The answer is no, you do not need to have a second adjustable-rate mortgage. You  are entitled to having a fixed rate second mortgage just as you are an adjustable rate note. While this is true, there are not many second lenders out there that offer fixed rate seconds paying principal and interest over time. Your  mortgage broker may have been trying to fit you into a home equity line of credit product which is why nature an adjustable-rate mortgage tied to the prime rate. You’d probably be okay taking out the equity line of credit now given that short-term interest rates are quite low, but down the road that could change.

Here’s why: home equity lines of credit are tied to the prime rate which directly follows the federal funds rate, when the Fed funds rate moves the prime rate moves, in either direction. When the economy begins to improve i.e. a reduction in the unemployment rate, stronger job growth and  stronger consumer confidence, the Federal Reserve will revert to a tightening policy and they will hike interest rates to offset a growing economy. We don’t anticipate this happening for quite a while, but when it does happen your payment will subsequently rise as well.


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