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A second mortgage is an additional mortgage on property that is extended to the owner when the property is already carrying a first mortgage. Second mortgages are often extended by the same lender who supplied the first mortgage. However, a second mortgage can be obtained from a different lender. In the event that the borrower fails to meet the payment schedule for both mortgages, the lender who holds the primary mortgage will receive payment from the foreclosure and sale of the property first. The holder of the second mortgage can then claim any remaining proceeds.
When a homeowner chooses to engage a second mortgage, the lender will typically consider the current outstanding amount of the first mortgage, the current market value of the property, and the credit rating of the applicant. After evaluating these factors, the lender will inform the borrower of the amount of funds that can be secured with a second mortgage. This figure may be more or less than the borrower hopes to receive from the transaction. Once the lender has informed the homeowner of the loan amount involved, and the rate of interest that will apply, he or she can determine whether to proceed with the application.
In most cases, a second mortgage will carry a higher rate of interest than a first mortgage. This is due to the fact that the lender is incurring a higher degree of risk, even when the financial condition of the homeowner is very stable. The increased risk to the lender does not indicate a lack of credit worthiness on the part of the applicant. However, the interest rate does recognize that in the event of default, the holder of the second mortgage would be unable to claim any funds from the sale of the property until the first mortgage was settled.
Along with the higher interest rate, a second mortgage is usually written for a shorter term than first mortgages. Often, this second loan on the property is taken out to make repairs or enhancements to the property, and is considerably less than the amount of the first mortgage. Under these circumstances, the homeowner is expected to repay the amount of the mortgage plus applicable interest within a shorter period of time.