Financial Resource: Beginner Investing to Financial Independence!

To understand the concept of a “second mortgage” loan, it’s important to understand its two fundamental concepts first - a “mortgage loan” and a “lien”. A second mortgage loan is based primarily upon these two conditions. A “mortgage” loan can be broadly understood as a kind of “contract” or a “legal agreement”, in which the borrower’s property is “pledged” as a “security” or “collateral” guarantee, and the borrowed “amount” or “credit” is generally repaid in “small packets” of predefined amount, which are also referred to as “installments”. As per the contract or the agreement, the “buyer” promises to repay the principal amount or the actual loan amount, and its interest, over a fixed period, also known as “loan tenure” in a regular and orderly manner. A “lien” is understood as a “legal right” or a “claim” imposed by the creditor or lender upon the property, against which the credit is “taken” or borrowed”. In a simple language a “lien” means the creditor has a legal right to dispose of the debtor’s property, in case of defaults or the debtor’s inability to pay the loan installments.

Refinance second mortgage is an additional mortgage loan, which is added to your “first”, or “original” mortgage loan. Since the new mortgage loan is “attached” in conjunction to the “first” or “original” mortgage, it’s generally referred to as a “second” mortgage loan - “second” because it falls at number “two” position in relation to the “main” mortgage loan. This “second” mortgage loan has all the characteristics of its original or main loan. In short, you’ve a condition in which two mortgage loans remain side-by-side, each loan with its unique set or terms and conditions.

Why avail a second mortgage loan?

Now, if two “loans” are to share the same “mortgage”, i.e. the same security or collateral guarantee, what’s the need of going in for a “second” mortgage? The answer’s quite simple. When people go in for a mortgage refinance loan, they understand the significance and the importance of a “lien”. Debtors know for sure, if they default, or end up with unforeseen circumstances and are unable to pay off their dues, the creditor holds a legal right to “sell” of the house offered as “security” and recover the dues. So individuals are very cautious about “secured” loans, and generally avail just enough credit to “satisfy” their requirements. As a result, the full potential of the lien is not “utilized”. It means if the property is worth $1, 00,000/- a mortgage facility of $40,000/- or $50,000/- is generally availed against the security. The remaining “potential” is left “unused”. That’s where a “second” mortgage comes in. If the borrower desires additional cash, or has a need to finance some requirement, the “unused” potential left over from the “first” mortgage activity can be used for the “additional” mortgage. Due to this, the 2nd mortgage is also referred to as a “home equity” loan. The two terminologies can be used in lieu of each other.

Advantages of a second mortgage loan

• The homeowners have to pay a smaller down payment, and in some cases, the down payment is totally avoided, to avail the additional credit. During the transaction, the homeowner has the option to break up the total loan amount into two separate loans referred to as a “combo” loan. The “encumbrance” or the “risk factor” is distributed between the two loans, allowing higher combined loan-to-values and a much lower “blended interest rates”.

• A second mortgage can be opened after the main or original mortgage is “availed” as a home equity loan or a home equity line of credit. The additional funds can provide a homeowner with much needed “cash” to improve the quality of their home or pay off high-interest loans. The biggest advantage is it’s possible to avoid a “refinance” of the existing first mortgage.

• Second mortgage helps homeowners to avoid paying PMI, or “private mortgage insurance”. The resultant savings can be substantial depending upon the loan break down, and often saves the home owner hundreds of dollars a month, in terms of additional expenses. If the first loan is kept at or below 80% loan-to-value, the additional PMI is not required to be paid.

• The monthly payments on the second mortgages are ideally low as compared to its “first” mortgage. The homeowners end up with a substantial amount of liquidity, which can be used to pay off existing loans or even finance a commercial project.

• The second mortgages are offered for both “adjustable” and “fixed-rate” options, so many options are available to choose from and to find the “exact” credit facility to fulfill your needs.

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