Mortgages

A “second mortgage” is one of the most profitable and secure investment strategies in the financial market today. Typically, higher interest rates are charged due to the lower dollars needed to fund these investments. The borrower is required to make payments on both the first and a second mortgage. If the first mortgage holder (lender or mortgagee) commences a foreclosure action they will have their attorneys do a title search. They will discover who else has a legal interest in the property. They will foreclose the interest of any second mortgage holders. What does this mean in plain English?

  1. Assume the property is worth $100,000. There is a first mortgage of $80,000 and a second mortgage of $10,000.
  2. You own the second mortgage. The borrower stops making payments on the first mortgage (or deed of trust). And the lender forecloses the loan.
  3. You have the right to bid and pay off the first mortgage and keep the property.
  4. Another possibility is that you could keep the first mortgage current and foreclose your second mortgage. Most lenders will agree to this, but they may not be forced to do this.
  5. Does this mean you should never make or own a second mortgage? Commercial lenders do make second mortgage loans PROVIDED the borrower has good credit AND a reasonable cash down payment has been made.
  6. Typically a second mortgage like the $10,000 above would sell for $5,000-7,000 if it is behind a $80,000 first mortgage and the property is worth $100,000. By comparison, the $80,000 first mortgage would probably sell for about $70,000.
  7. Also you can reduce your risk if the Combined Investment to Value (CITV) ratio is lower. For example. Say the property is still worth $100,000 but the first mortgage is only for $70,000. The second mortgage is for $10,000. If you can buy this second mortgage for $7,000 the CITV is now 77%. ($70,000 first mortgage plus the $7,000 that you pay for the second mortgage divided by the property value $100,000).