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Second Mortgages and Their Lenders

Posted by  on May 10, 2010
 
A second mortgage is a loan that a borrower takes out based on the equity of his or her previously mortgaged property. These loans are also known as equity loans. Second mortgages are based on the market value of the home minus the balance of the first mortgage. Second mortgage loans may extend for as long as 15 or 20 years; others may require repayment in as little as one year. Repayment terms may be discussed between the borrower and the individual mortgage company.

Mortgage brokers are often large companies that are involved in a number of financial endeavors. Mortgage brokers primarily serve as mediators between the borrower and lender. Mortgage brokers bring professional experience and advice to a complex process like second mortgages. Mortgage brokers will be able to assist borrowers with either poor credit or those with a bad credit mortgage loan.

The maximum amount available on a second mortgage is the full market value of the collateral security you provide. The second mortgage lender holds the legal title of your property. This legal title is known as equity of redemption. However, equity redemption holds good only as a security for the amount of loan. It does not carry any real ownership powers.

Mortgage brokers may require a small fee for obtaining a second mortgage. The fee is usually calculated to a certain percentage of the loan amount. If you opt for a fixed rate loan, the interest rate is fixed for the life of the loan. Many mortgage companies offer variable rate mortgages called adjustable rate mortgages (ARM's.) This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change).

Lenders do set some special conditions on second mortgages. Depending on the conditional clauses set by lenders, you can refinance a second mortgage or may have additional cash on the second mortgage. Since second mortgages are fixed rate mortgages, they are available for a period of up to 30 years.
There are two types of second mortgage loans that you can apply for, the closed-end loan and the open-end loan. The closed-end loan allows results in one lump sum of cash at the time of closing. Closed-end loans can have a repayment schedule that is amortized up to 15 years with a three- or five-year balloon payment. When the balloon balance is due, you can choose to pay off the balance or refinance the remaining money you owe. Unfortunately, closed-end loans do not allow the borrower to borrow any further than the initial loan.

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