What Is the Difference Between a Mortgage and a Second Mortgage?

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The mortgages on a piece of real estate carry a number: first mortgage, second mortgage and more. A first mortgage is called a first mortgage because it is the owner's initial lien on the property, presumably to buy it. He may then take out a second, third or more liens on the property to get additional cash. That system of numbering refers to the order in which they have been recorded. Furthermore, it is that numbering system that indicates the priority of the mortgages that are to be satisfied in the event of a default.

First Mortgage Also Called “A Buyer's Mortgage”

In most cases, a first mortgage is used to buy a piece of real estate. It can have a maturity of 40 years, but the majority of them are for 15 or 30 years. As a general rule, the longer the maturity, the lower the monthly payment will be. A first mortgage can be refinanced because rates are lower than the original mortgage; the owner wishes to lower his monthly payment by restoring the term of the first mortgage, or he may want to tap any increase in equity he may have in the property. If he stops making mortgage payments, “a buyer's mortgage” is the first one to be paid, followed by the second, third and fourth mortgages.

Second Mortgages and More

Rather than refinance the first mortgage, which can be costly, a real-estate owner may choose a second mortgage instead to raise the money he needs. Furthermore, each time that you mortgage the real estate, you have the option to either receive the cash in a lump sum and begin making monthly payments, or have a line of credit, called a home equity line of credit (HELOC), that you can draw down as the needs arise. With a HELOC, you will begin making payments monthly when you begin drawing down the loan; in most cases, the interest rate will be variable.

Multiple Mortgages

In the past, parts of the U.S. experienced a large run-up in housing prices, so there were homeowners that had mortgaged their homes multiple times. In some cases, they may have done so six or seven times. But when housing values go down because of the economy, lenders who made those loans could hold mortgages on real estate that will not be covered in the event of a default.

Foreclosure

If you run into financial difficulty and can no longer make all the monthly payments on your mortgages, you may be able to stall foreclosure proceedings by making the payments only on those mortgages than would be covered by your home's equity. There was a time when lenders were eager to make second, third and fourth mortgages even though the real estate had little excess equity, because they reasoned that inflation would make up for it over time. But in a down economy, housing prices can be affected, which could make homeowners with multiple mortgages owe more than their homes are worth, making lenders holding those mortgages unsecured creditors. A lender that is not secured is much less likely to file foreclosure proceedings than one that is. Before you do this, seek legal counsel.

Prevention/Solution

Make sure of two things before you consider remortgaging your home. First, be certain that you will be able to cover the monthly payments that the new mortgage will require. Also, before approaching a lender, be sure that the value of your home has appreciated sufficiently to warrant the costs associated with applying for a new mortgage loan.

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