What is an Interest Only
Mortgage?
A second mortgage is a mortgage that’s provided to
a person who holds a property that already has a first mortgage.
Second mortgages are, for the most part, given by the same
lending company that extended the first mortgage.- but it’s
not unheard of for people to seek second mortgages from a
different lender. If a borrower fails to make timely payments
on each mortgage, the lender with the first mortgage will
be repaid first in the event of a foreclosure and sale. The
second mortgage holder gets whatever is left over.
When you choose to get a second mortgage, lenders usually
consider how much you owe on your first mortgage. They also
think about the property’s fair market value, and your
credit rating. All three of those factors combined help the
lender decide whether or not you get the mortgage, and if
you do, how much you’re approved for. Once you know
how much you’re going to be able to get, and at what
interest rate, you can decide for yourself whether to go ahead
with the mortgage.
For most home owners, a second mortgage will come at a much
higher interest rate than their first. Why? With second mortgages,
lenders are taking a much higher risk- even if the borrower
is very financially stable. The lender’s higher risk
doesn’t mean that they think you are a bad credit risk,
but they will raise your interest rate to recoup what they
will lose if you default on your first mortgage.
Along with a raised interest rate, a second mortgage usually
comes with a much shorter term than a first mortgage. Most
times, this second mortgage is taken out so that the home
owner can make repairs, remodel, or otherwise augment the
property. Most second mortgages are for far less than a first
mortgage, and home owners are liable to pay the full amount
plus interest much sooner.
As you may already know, your home or property can carry
more than one loan. Mortgage loans are registered with your
home county or city, and the earliest registered one takes
priority. It is possible to take out a third or even fourth
mortgage, but these are much less common than first or second
mortgages because of the extremely high risk to lenders. Mortgages
aren’t meant to cover short-term financial difficulties,
but they are a way to be able to afford to send a child to
college or make improvements.
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