2nd Mortgage debt consolidation
One of the biggest advantage real estate investment offers is the possibility to mortgage it for a second or even a third time. This is because the value of the real estate property that is mortgaged for the first loan continues to increase during the loan tenure during with additional owners equity is created. The owner may choose to utilize this equity through second and third mortgages.
Quite often, the real estate property owners avail loans through second mortgage. Second mortgage and such subsequent mortgages come into picture when the loan taken for the first time is a long-term loan. Examples of such long-term loans include home loans. Such secondary mortgages allow the homebuyer to tap the additional equity that has accrued as capital appreciation on the asset mortgaged for the first time.
The lenders are generally amenable to providing additional loans on second mortgages. However, they safeguard their interests before allowing the borrower to go ahead with taking a second mortgage loan. Another feature of second mortgage is that the lenders prefer to give such loans themselves rather than allow a third party to acquire interests in the property. The first lenders interest in the underlying real estate is at a risk if there is a third party willing to offer second mortgage. To avoid such problems, the first lender may stipulate that the borrower should not seek a second mortgage loan on the underlying property without prior explicit sanction from the first lender. On the whole, however, if the value of the property has increased substantially, the lender remains open to the idea of letting the borrower take a second mortgage loan on the underlying properties.
The borrower may utilize the additional loan for different purposes such as repairing the existing structure, adding additional features the mortgaged property, or even debt consolidation.
These mortgages offer borrower a chance to take out substantial equity and repay it in smaller equated installments that are affordable. If the borrower has borrowed heavily from elsewhere, these types of loans are ideal for squaring them off, especially if such subsequent borrowings entail heavy interest burden.
Another advantage for borrower is that the interest paid on the second mortgage loan is also allowable as deduction under income tax against any interest incomes that the borrower may have. This is not possible with other loans such as vehicle loans.
Since the amount is repaid over a longer period, which, however, is within the overall tenure of the first mortgage, the inflation factor works to borrowers advantage. That is, if the installments paid out by the borrower are discounted at the annual interest rates of each year in which such installments are paid by the borrower, the total payout will turn out to be much less than what the borrower bargained for. This should offer considerable consolation to the borrower, because interest rates on second mortgages are higher than the conventional home loans, even if they are lower than other forms of borrowings such as credit card loans.
From lenders perspective, the borrowers credit management skills are well evaluated, and therefore, further evaluation of the debtor is not essential. Decrease in such administration expenses add to the bottom line of the lending bank. There is decrease in idle cash as well. Apart from this, the risk of borrower making a mess of the existing situation because of excessive borrowings, or borrowings at higher rate of interest from elsewhere is mitigated. This is important because even if the lender is secured, there may come a situation in which the bankruptcy court may ask the secured lenders to compromise on some of their receivables.
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