A second mortgage is just what it sounds like. It is mortgage taken on property that is already mortgaged. A second mortgage carries more risk to the lender than the first mortgage as the first mortgage will be serviced first if the debtor defaults on the payments.
Second Mortgages – Cash from Property Equity
Second mortgages are in fact short term loans that typically run from one to five years. People usually make these loans to improve their property or to consolidate expensive debt. Granted second mortgage interest rates are usually higher than the interest rate on the first mortgage, but they are still a lot less expensive than other forms of debt such as credit card debt that attracts interest rates of almost thirty percent. Second mortgages are also handy for entrepreneurs who wish to grow their businesses by converting the equity tied up in their fixed property into cash.
Second Mortgages – the Preserve of Private Lenders
Generally speaking conventional banks are not active in the second mortgage industry so second mortgages are usually the preserve of private lending companies. The most efficient way to find a private lender is to contact a mortgage broker. These intermediaries usually have a broad spectrum of loan providers on their books and they can match your requirements with the best private lender. Since they are familiar with the industry they may even offer suggestions or promote products that you may otherwise never have heard of.
Private lenders are a lot more flexible than conventional banks and they can offer applicants customised products that can include interest only payments. They are customer friendly and you will have a chance to speak to them about your requirements so that the product that you finally agree on is tailormade to your needs.
Because private lenders are not regulated by government or by Central Banking requirements, they are able to waive some of the requirements for credit worthiness. Private Mortgage providers are more interested in the market value of the property that will stand as collateral for the loan than they are in the business of the borrower. They do however have some requirements as they have to protect their own businesses.
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Criteria for Second Mortgages
Most private lenders will not offer a mortgage where the value of the mortgage equals eighty percent or more of the appraised value of the property. If the borrower has put a down payment of at least twenty percent on the property the private lender is much more likely to approve the second mortgage. When applying for a second mortgage it is likely that the private lender will scrutinise the income of the applicant to satisfy himself that the borrower is capable of servicing the loan.
Private Mortgage Lender’s Interest Rates
As previously stated a second mortgage is riskier than the first so it follows that the interest rate on these loans is higher than rates charged on conventional mortgages. The annual interest rates on second mortgages can vary from seven to thirteen percent. The borrower will also be liable for mortgage initiation costs, which can include appraisal costs, legal fees, broker fees and lender fees. These are sometimes included in the loan so that they don’t have to be paid at the start of the contract.