A second mortgage is an additional loan on a property that is obtained after the first mortgage. The lender considers the outstanding amount on the first mortgage, property value, and credit rating before deciding on the loan amount and interest rate. Second mortgages have higher interest rates and shorter terms than first mortgages.
A second mortgage is an additional mortgage on the property that is extended to the owner when the property already has a first mortgage. Second mortgages are often made by the same lender that provided the first mortgage. However, a second mortgage can be obtained from a different lender. In the event the borrower misses the payment schedule on both mortgages, the lender holding the primary mortgage will receive the foreclosure payment and sale of the property first. The second mortgage holder can claim the remaining proceeds.
When a homeowner decides to take out a second mortgage, the lender will generally consider the current outstanding amount on the first mortgage, the current market value of the property, and the applicant’s credit rating. After evaluating these factors, the lender will inform the borrower of the amount of funds that can be secured with a second mortgage. This figure may be more or less than what the borrower expects to receive from the transaction. Once the lender has informed the homeowner of the loan amount involved and the interest rate that will apply, the lender can determine whether to proceed with the application.
In most cases, a second mortgage will have a higher interest rate than a first mortgage. This is due to the fact that the lender is incurring a higher degree of risk, even when the owner’s financial condition is very stable. The increased risk to the lender does not indicate a lack of solvency on the part of the applicant. However, the interest rate recognizes that in the event of a default, the holder of the second mortgage will not be able to claim any proceeds from the sale of the property until the first mortgage is paid off.
Along with the higher interest rate, a second mortgage is generally written for a shorter term than first mortgages. Often this second home loan is taken out to make repairs or improvements to the property, and is considerably less than the amount of the first mortgage. In these circumstances, the homeowner is expected to repay the mortgage amount plus applicable interest in a shorter period of time.
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