We all know why people go in for home loans; it is obviously to purchase a home. Home loans are mostly offered by mortgage companies or financial institutions that allow borrowers the opportunity to fulfill their dreams.
The first loan used for the purpose of purchasing a home is normally referred to as first mortgage. If there is a ‘first mortgage’ then borrowers should know that they can go in for a second mortgage. If the first mortgage is to enable a borrower to buy a home, then why would the person require a second mortgage?
Second mortgages are not necessarily meant for the purchase of a home as the name may suggest. Second mortgages are a class of loans that can be used for a variety of expenses.
They are loans that are contracted based on the level of equity a borrower has on his or her home. This can be done even when the borrower has not finished paying the mortgage on the original loan that was used to buy the home.
Since the borrower uses the home as a guarantee on the loan, the borrower is able to borrow large sums of money depending on the market value of the home. Lenders are not afraid to give out huge amounts because they know that in the event that the borrower defaults, they can always take over the home.
Second mortgages are treated like basic mortgage loans. The loans are subjected to closing costs and charges just like any mortgage loan. The borrower may also have to pay an estimated one percent of the value of the loan before the loan is granted. The greatest risk associated with second mortgages is that should the homeowner become delinquent, the bank will foreclose on the home.
In spite of these perceived negative aspects of second mortgages, people still prefer to go for second mortgages for a number of reasons. They provide the borrower with a chance to acquire large sum of money to meet their financial expenses. Money obtained from a second mortgage can be used to pay educational expenses, renovate an existing home or embark on an investment drive.
Second mortgages have a lower interest rate than conventional bank loans or credit card loans. Aside the fact that bank loans offer loan amounts that are lower than second mortgages, the interest rate on a second mortgage is also lower because the borrower is seen as a low risk borrower.
The risk factor of a borrower is a very important aspect of determining the rate the lender would slash on the loan. By using his or her home as a guarantee for the home loan, the borrower succeeds in telling the lender that should the loan default; the lender would still be able to recoup the investment.
The fact that a borrower can get hold of a large amount of money brings the need for the borrower to be circumspect. There has been time when people have been led into acquiring large second mortgages but ended up not using the money in a venture that would increase their financial capacity. In such cases, second mortgages become an unwelcome addition to a borrower’s expenses, since he or she would have to make two monthly mortgage payments.
In any case, the first mortgage always takes precedence over the second mortgage. For which reason second mortgages have higher interest rates than first mortgages.