Now let us try and understand what is a second mortgage loan and what are the conditions in which the lender will sanction it. Second mortgage is, like the name suggests, a loan taken where the asset/property is mortgaged for the second time. Simply, it is a second loan taken on the mortgaged property. It is also a secondary mortgage in the sense that, in case there is a default on the loan, the property will be sold and the proceeds will be used to pay off the first loan. The remaining proceeds from the foreclosure, if any, will be used to pay off the second mortgage. So the second mortgage lender runs a risk that he may not recover the money he lent. So as this is a risky proposition for the lender, a second mortgage rate is understandably higher.
But how does a second mortgage work. A second mortgage has its share of restrictions. For instance, you don’t get to decide the amount you will get for your second mortgage. The amount of a second mortgage is decided by the built up equity. The built up equity on a property may be defined as the difference between the market value of your home and the amount of mortgage payments due. Hence, if your property is worth $100,000 and your outstanding mortgage payments are $65,000 then you will receive an amount of $35,000 for your second mortgage. Sometimes, although very rarely, there is a chance that the lenders will allow your total debt to go up to 125% of your property value. In this case, you can obtain an amount of $60,000 on your second mortgage. But the chances of that are very rare in the present circumstances and requires an excellent credit history. But second mortgage rates of interest are very high and it is a risky proposition overall for both you and the lender.
Advantages of a Second Mortgage Read the rest of this entry »
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