subject: 2nd Mortgage Loans Explained [print this page] 2nd Mortgages Loans refers to mortgage loans that are second in line to other mortgages, which are in what are called first position. First position means that in the event of a default on the property, the holder of the 1st mortgage will get paid before the holder of the 2nd mortgage loan.
This type of loan can come in many forms. These forms include 30 year 2nd mortgage loans, home equity loans, and home equity lines of credit.
Rates on second mortgages are typically higher than on first mortgages. The reason for this is that the risk for lenders is higher on 2nd mortgage loans, and in the case of default on the property, the lenders of 2nd mortgage loans will be paid after the lender of the first.
Rates on second mortgage loans, can be fixed, but in the case of home equity loans, are usually variable. This means that rates on 2nd mortgage loans are tied to some index, such as treasury bills, or what is called the LIBOR. This in itself makes 2nd mortgage loans more risky from the perspective of the lender, in that the monthly payment could potentially increase significantly, even if the borrower's income remains fixed.
Lenders, since the days of more loose lending have become much more conservative when offering 2nd mortgage loans. Lenders of 2nd mortgages consider what is called the CLTV, or combined loan to value ratio.
The CLTV is the ratio of all mortgage loans, including 2nd mortgage loans, to the value of the property. If a property is valued at $100,000 and there are two mortgage loans on it, a 1st and a 2nd, the 1st being $60,000 and the 2nd being $20,000, the combined loan to value would be 80%. Many lenders of 2nd mortgage loans like to see a combined loan to value of no higher than 80%, so that there is some equity in property in the case of default.
Lenders of 2nd mortgage loans though do have some leverage in the case of a short sale for example. A short sales is where the lender, or lenders of all mortgage loans, including 2nd mortgage loan on a property agree to accept less than what the owner owes on a property.
This is often a good option for the lenders, rather than seeing the property go into foreclosure and receiving pennies on the dollar at auction. Lenders of second mortgage loans have the ability to approve or deny any short sale agreement based on what they expect to take away from the transaction.
This is good in some cases, as lenders of 2nd mortgage loans can protect their own interests, but at the same time if they expect to much, they can throw a property into foreclosure and receive only a fraction of what they might otherwise receive.
