09 Feb Second Mortgage and Second Mortgage Program
To many of us purchasing property is going to be the biggest investment of our lives. To fund this most will need to agree to provide a mortgage. From time-to-time, however, circumstances will arises in our lives when we need to think about getting a second mortgage on our property. So: what exactly is a second mortgage; and, possibly more importantly, why would you even consider this financing option?
What is a second mortgage?
Simply put, a “second mortgage” is security that you provided to a lender in consideration for that lender agreeing to provide you with a loan, i.e. it’s a secured loan. The security you agree to provide the lender is a charge over your property. However, as you have already agreed to provide another lender with a “first mortgage”, a second mortgage gives your new lender a second bite at the security cherry – your property, i.e. they agree to be paid-out of the proceeds, following any sale of the property, subsequent to your existing lender.
What types of second mortgage can I get?
From the outset it important to note that a second mortgage is a security agreement – not a debt one – although it can sometimes be difficult to tell the difference. The reason why it is called a second mortgage is because the security given is a second charge over your property (home). Consequently, a second mortgage can be provided for almost all types of debt, from a home improvement loan to debt consolidation.
What’s the difference between a second mortgage and second “rank” mortgage?
None – a second rank mortgage is a second mortgage by a different name. However, as you already have an existing mortgage over your property, it is usual to call this a “first rank” mortgage – meaning that any subsequent mortgages you get will rank subsequent to the first. Therefore, it is possible to have second, third, etc., mortgages.
Why would I want to get a second mortgage?
There are almost as many reasons why you would want to have a second mortgage as there are reasons to borrow! As mentioned above, in reality a second mortgage is a charge over your property in consideration for money borrowed by you. Consequently, you may wish to get a second mortgage to fund: * Home Improvements
Property owners who wish to improve their homes are probably the main reason why second mortgages are given. Here, home improvements may be taken out for a number of reasons, from improving the kitchen to extending the house.
One thing to note: strictly speaking a home improvement loan, secured by a second mortgage, differs from all other second mortgage loans as the increased value of the property (because of the home improvement) is usually taken into consideration when the lender agrees to provide the loan.
You want to improve your home by building a greenhouse, which will increase the value of your home by $10,000. Because of the increase in the value of your home, the bank agrees. However, in return for agreeing to this, the bank asks for a second mortgage.
* Debt Consolidation
With the easy availability of credit these days, the second reason why second mortgages are often provided is because debtors wish to consolidate their debt. Here, what property owners agree to do is convert their expensive unsecured loans into a less expensive secured loan.
You owe $10,000 on your credit cards and your credit card companies are charging you 15% for this debt. The bank agrees to lend you $10,000 dollars at 10%, to repay your credit card companies, in return for you providing them with a second mortgage. Taking out the loan to repay your credit card debts equates to debt consolidation.
* Personal Loan
There may be a number of reasons why a property owner would like to provide a second mortgage in return for a person loan. Chief among these reasons, however, is in order to pay for the education costs of their children. In this case the borrower usually has equity (i.e. the value of their property exceeds the outstanding debt under the first mortgage) in the property and is trying to borrow against such equity.
Borrower wants to pay for the university costs of their child. The bank is willing to lend the borrower $30,000 on the equity value of their property, in return for which the borrower agrees to provide the lender with a second mortgage over the property.
Can any property owner get a second mortgage?
No – it is important that you check with the lender to whom you gave a first rank mortgage before agreeing to provide a second mortgage. Having said that, if you have any equity value in your property, it is likely that your first rank lender will agree to you providing a second mortgage. What happens if I default on my payment?
By providing you with a loan secured by a second mortgage, your new lender agrees to subordinate themselves to your first lender. In effect, what this means is that your first lender will be repaid their outstanding debt before your new second lender. As such, it is commonly the case that if you default on your loan, your second mortgage lender cannot enforce against the security until such time as they have received permission from your first lender to do so (although you will need to check your loan agreements to make sure this is the case in your case).
Will a second mortgage become a first mortgage?
Yes: in the event that you repay your first mortgage lender, if you still owe money on your second mortgage loan, your second mortgage will be promoted in order to a first mortgage.
How much will a second mortgage cost?
Aside for the additional risk of losing your property, the costs associated with a second mortgage are usually the reason why most borrowers are put off by this type of financing. In short, if you decide to pursue a second mortgage, you’ll be expected to pay for: * a survey of the property to determine its value;
* government fees for registering the second mortgage –as well as any other costs (e.g. legal fees, title, escrow…etc);
* a slightly higher rate of interest than you are currently paying on your first mortgage – to account for the additional risk – but usually this will be less than is the case with an unsecured loan. Conclusion
Without doubt second mortgages are an extremely useful means of obtaining funds; however, you do need to consider all of the issue to-hand. Hopefully the above shows you some of the benefits and pitfalls of providing second mortgages.
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