Second and Third Mortgages Explained:
A private second or third mortgage on a residential or commercial property is by far the most common type of private mortgage financing. There are reasons for this from both the borrower’s perspective and lender’s perspective. Borrowers utilize a private second or third mortgage to consolidate debt while leaving their existing first mortgage intact. A long term first mortgage is likely going to carry a lower rate than a private first mortgage, so if the first mortgage can be left alone a private second or third mortgage can be an excellent source of incremental cash flow.
Borrowers utilize a private second mortgage or third mortgage to consolidate debt while leaving their existing first mortgage intact. A long term first mortgage is likely going to carry a significantly lower rate than a private first mortgage, so if the first mortgage can be left alone, a private second or third can be an excellent source of incremental cash flow.
With respect to debt consolidation, even at higher than bank rates, a private second or third mortgage can allow the borrower to consolidate short term debt such as credit card balances and still end up with a lower interest rate. And because private mortgage debt servicing requirements are typically interest only, a debt consolidation loan can provide considerable relief to cash flow as well.
Another key benefit to securing a private second or third mortgage is the speed in which it can be put into place. While the average first mortgage will be placed in 5 to 10 business days, it is possible to go from application to funding a second mortgage in 2 to 5 business days.
From the lender or investor point of view, private seconds and thirds are ideal for building a portfolio of mortgages and spreading their risk across a number of mortgages. This is due to the fact that private seconds are typically for amounts under $200,000, greatly limiting the lender risk on any one loan.
Because of the second and third mortgage position, there is greater risk to a mortgage lender, so private second and third rates will also be higher than first mortgage rates, which is also attractive for many lenders that are looking for a certain rate of return on their money.
Lenders will typically charge both an interest rate and a lender fee on closing which collectively makes up their total rate of return on any one deal.
Most private seconds and thirds will provide a term of one year and some will provide an option for term renewal, but that is not typical among private lenders. In general, the stronger the real estate market in any area, the more private money will be available for second and third mortgages as lenders will have to approve funding on higher loan to value ratios where the related risk can only be managed by the strength of the resale market for similar property types.
Private Second and Third Mortgage Costs:
Although a private mortgage can help borrowers get out of a sticky situation, there are additional costs to consider.
First is the higher interest rate, which can range from a couple of percentage points above the bank rate to upwards of 15 percent. Lenders weigh the interest rate based on the LTV (loan-to-value), the property location and the overall risk of the loan.
Most private lenders charge between 10 and 15 percent for a 80-90 percent loan-to-value second mortgage.
Other costs borrowers should be aware of with a private second and third mortgage are lender fees, broker fees, legal fees and an appraisal.
