How do Second Mortgages Work?
Many people are familiar with the idea of a first mortgage on a property. The idea is fairly straight forward. You take out a loan which is secured by a particular property. It serves as collateral which reduces the risk for the creditor and makes it more likely that the property owner will get the loan. However, fewer people are familiar with the idea of a second mortgage. This is unfortunate because this type of financial agreement can offer some real benefits.
When you are in need of money to fund your projects or goals, a second mortgage can be a great option. As the name suggests, a second mortgage involves securing a loan against your real estate property, which is already mortgaged.
Second mortgages basically involve an additional loan on top of the existing mortgage on a property. The second creditor is generally subordinate to the first one. What does this mean? It means that in the event of a default, the first creditor’s obligation will be the first to be paid out using the collateral. The second creditor is only able to access what is left. This means that the second creditor takes on more risk.
Benefits of Second Mortgages – Loan Amount
So what are the advantages of second mortgages? One important benefit is that second mortgages can be used to gain access to large financial amounts. Since the loan will be secured using the property as collateral, this gives the creditor greater security. Of course, the second creditor has less security than the first one. However, this is why the second creditor will take into account the amount of the first mortgage versus the value of the property. So the value remaining in the property is something that is important to consider.
Benefits of Second Mortgages – Quick Finance
Second mortgages can require less documentation and paperwork than other loan types. This makes it possible to get your hands on the loan proceeds quickly. This is importnat when time is of the essence. For example, you may need access to funds right away because a great investment opportunity has become available which won’t be around for long. Or your business may need some bridge financing in the short term. If you try to apply for other kinds of loans, the pace at which the application moves can be much slower. By the time the funds are released, your investment opportunity may have already been snapped up by others. Second mortgages can help you gain quick access to the finance you need.
Benefits of Second Mortgages – Competitive Interest Rates
Another important benefit relates to interest rates. It is true that the interest rates of second mortgages can be slightly higher than those of the initial mortgages. That is simply a consequence of how these financial instruments are created and the greater risk that the creditor faces. However, the interest rates involved in second mortgages can still be much lower than those offered by other financial products, such as credit cards. This is why it can be possible to refinance your existing credit card debt by paying it off using a second mortgage. The interest rates will be much lower. The length of the loan term can be longer as well, meaning that the end result could make it easier for you to pay back your debts.