2nd mortgage
Unlike most assets, value of real estate properties, bullion, and at times stocks, continues to appreciate, even after mortgaging these properties. The borrower may choose to withdraw such accumulated equity under second or even third mortgage.
Though gold, silver, diamonds, and sometimes stocks, appreciate over time, generally second mortgages are associated with real estate properties.
As the words suggest, second mortgage loan may only be availed if there is a first mortgage loan, and such first mortgage loan has to run concurrently with the second mortgage loan. Though not essential, generally the lenders offer loans on second mortgage on terms and conditions designed such that the term of the first mortgage encompasses the term of the second mortgage. Therefore, if a borrower takes a home loan of 10000 dollars, for 10 years, and then takes another loan of 5000 on second mortgage, after 5 years, the lender will not lend the second loan to extend beyond the original term.
Like home loans, loans secured through second mortgages are also repayable in equated monthly installments, which is divisible into interest and principal.
The rate of interest applicable on second mortgage loans is obviously higher than the interest rate on home loans. But on the whole, it is a whole lot cheaper than other forms of commercial loans. Moreover, the disadvantage of paying slightly higher rate of interest is considerably outweighed by other advantages such as affordable equated monthly installments, and longer repayment term which allows for discounting of the installments (both the interest and the principal components within the installments) at inflation rates of each year in the loan term.
The interest component out of the installments paid in each year is allowed as deduction against any interest income earned in that year. Effectively, the borrower ends up paying much lower than what he initially bargained for.
Borrowers avail loans through second mortgages to repay existing costlier borrowings, or to acquire a new asset or to meet other exigencies.
Acquisition of buy to let properties becomes considerably easy with such second mortgage of an existing real estate property. For buying any property, the purchaser has to put in some equity before the lenders release any funds. One way to raise such mandatory owners equity (which may range anywhere from 10 to 20 percent of the new property being acquired) is to take second mortgage on an existing real estate property. Of course, the borrower must first be very sure of his ability to repay both the loans. There are many people who do their tax planning in this way.
The borrower may opt to take the second mortgage on the property from the same lender or another lender. For taking such second mortgage loan from other lenders, the borrower has to first obtain a clearance from existing lender. Such a clause is generally built in within the first mortgage loan agreement. If the owner's equity in the property is substantial, then the lender may agree to let the borrower take a second mortgage loan from third party. However, if such is the case, the lender may be agreeable to extend further loan through second mortgage to the borrower. The income of the borrower and the promptness with which the borrower has been paying the existing loan is important for any such consideration.
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