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- What is Second mortgage?
- Second mortgage is a second loan on the same property that has a mortgage already on it. Second mortgage is typically used by home owners to get the cash availability. It could be for any reason they need either for business debt consolidation etc. 2nd mortgage can be done either by the same lender or bank that you already have your first mortgage with or can be with another lender. 2nd mortgage often is associated with some fees and home insurance policy changes and penalties.
It is a risky business for lender to invest in the property as a 2nd mortgage for many reasons. The first and most important reason is that their investment will be paid after the first mortgage lender will get their share of claim in case of default on property. Whatever is left after disposing is than the 2nd mortgage lender recovery. In 2nd mortgage business the first mortgages lender has the right to dispose of the property in case of default and recover its full share from the sale of property so the 2nd mortgage is often a high risk for lenders that is the reason 2nd mortgages are with higher interest rates.
Here is the example
Mr. Paul has a home worth $ 300,000 his first mortgage is with “Low Interest Loans”
Financial institution with $150,000 as an outstanding amount in his first mortgage
He is paying at the rate of 2.9% on his current mortgage. Mr. Paul decided to expand his business and he needs cash so he decides to take a 2nd mortgage on his home for $50,000. He goes to another financial institution named “Find me a Mortgage” for his second mortgage and they agreed to give Mr. Paul 2nd mortgage of $50,000 on 4.2 % interest rate.
In this scenario a 2nd mortgage lender “Find me a Mortgage” will put his name on the insurance policy as a second mortgage lender. Incase if Mr. Paul defaults on his first mortgage the first lender has the right to sell the property and claim their outstanding amount of $150,000 so they sell the property for $170,000.
In this scenario the first lender “Low Interest Rate Mortgage” covers their full outstanding of $150,000 but the second lender “Find me a Mortgage” only gets $20,000 out of his $50,000.