2nd mortgage property investments
2nd mortgage property investments are typically smaller scale operations, due to higher interest rates and smaller loan amounts (than the original mortgage).
A second mortgage, also known as home equity loan, is the amount you can raise by lending against the difference between the appraised value of your home and the outstanding balance on your mortgage.
The amount you can borrow against that difference (and the interest rate you pay for the loan) is also dependent on the homeowners creditworthiness.
The interest rates you typically have to pay on 2nd mortgages are higher than on a first mortgage because of the second lien.
A lien is a claim against property, in mortgages that lien is taken against the house.
In case of default, the holder of first lien on the property is first in line to get money out of the property, which leaves the holder of the second lien claim with more risk (which is reflected in the higher interest rate you have to pay for the 2nd mortgage).
2nd Mortgage Property Investments - Opportunities
Because of the higher interest rates and the smaller capital base on a second mortgage, if used to finance property investments, these loans are often used for smaller scale, quick turnaround type of property investments.
For example, a property investor who specializes in fixer-uppers could use a 2nd mortgage (from a property on her portfolio of real estate investments) to carry the short-term costs of the project.
Whatever type of property investment you use the 2nd mortgage for, you need to pay extra attention to the structuring of the mortgage deal.
These loan structure details include structuring monthly payments and the possible extra fees if you want to pay early.
You should also compare lenders, their rates, loan structures, and details of the deal to get to the best deal, as these features vary greatly between lenders.
2nd Mortgage Property Investments - Education
Before taking the step of using 2nd mortgages for property investment purposes, you should educate yourself fully on the risks of leveraging your house for additional risk capital, as you stand the chance of losing it all in case of default on loan payments.
This education should include detailed investment plans that you should go through with your representative at your bank.
Using a financial consultant is always a good idea, and in case of high leverage investments, such as 2nd mortgages, only more so.
You should also use your lawyer to go through the finer details of the plan and associated offers from lenders to minimize both the legal and financial risk involved, as there may be regulatory barriers to using your home equity for certain types of investments.
For further reading on mortgage lending, check out:
Federal Reserve Loan Checklist (a checklist that allows you to compare different types of loans and credit from the Federal Reserve) and Federal Trade Commission Mortgage Information for consumers. Both are available on the web.
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