Mortgages: A Beginners Guide
A second mortgage may be created where there is equity in the property over and above the amount owed to the first lender. In times of property value inflation there can be a situation where the current market value of the property has increased from the time it was purchased but the amount borrowed has remained the same ( interest only mortgage) or even reduced (repayment mortgage). The difference between the amount owed on the mortgage and the current market value is known as equity. Unfortunately, in times of falling property values there can be a situation where the amount owed on a mortgage is greater than the market value. This is known as negative equity.
The owner may borrow against the equity under a second mortgage and loan agreement with a completely different lender, often a finance company. Second mortgages are popular for home improvements such as house extensions and double glazing. In this type of mortgage the second lender notifies the first lender of the transaction but the title deeds remain with the original lender. In the event of the borrower being unable to meet his commitments and keep up repayments, the first lender has first call on the security of the property. It follows that the second lender sees his involvement as being at higher risk and the higher interest rates charged reflect this.
In theory it is possible to have a second, third, or subsequent mortgages, provided there is sufficient equity but in practice it is uncommon to have more than two charges.
Related Tags: property, loan, mortgage, lender, property values
Arthur Venables has worked as an independant mortgage adviser and in 2002 he was the author of 'Mortgagegen', a layman's guide to finding the right mortgage. Visit his sites http://www.debt-consolidation-loans-uk.com and http://www.debtconsolidationloans.org.uk
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