Second & Reverse Mortgage

The article is about Second & Reverse Mortgage. A ‘mortgage’ is simply a loan taken from a money lender or mostly a bank, which is paid back, with interest over a certain number of months or years; along with the initial capital amount. Although paying back a mortgage itself can be a very costly affair, unprecedented expenses may also arise at any point of time. For example, there might be a wedding taking place in the family, or even putting together resources to put a child through college.

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Whatever be the circumstance or family occasion, chances are that with an already existing mortgage, it would be difficult to take care of the new expense. Moreover, you may not also be in the financial condition to take a fresh loan from the bank. In such cases what can one do? In such cases, where one’s house is the only prime asset at hand, people take what’s called as a ‘second mortgage’.

A second mortgage works just like the first one. One would have to apply to a moneylender or to a bank and depending on what is the value of the house and also if one matches the criteria laid down, another mortgage is given.  A good advantage would be that, in some countries no matter even if the person is in deep debt or if the first mortgage is of a very high amount, he can still get a second mortgage.  One point of concern while applying for a second mortgage would be the equity or net value of one’s home.

That net value would of course increase if a person has owned the home for some time. Especially since property prices only seem to be increasing everywhere, over time the net value would have only increased. A money lender or a bank would first take a look at what is called as the loan to value ratio which means what the value of the house and what is the loan is being asked for. If the ratio is favorable, a money lender would be more than happy to step in.

Two main advantages of taking out a second mortgage loan is that firstly, there will be instant cash at hand to use for the emergency and secondly, it is noted that mortgage interest rates are usually lower than the interest rates on unsecured loans and the like. However, there are also points which need to be thought about carefully. The first most important point is that it is best to have a steady flow of income or some other source of money generation, so as to finish off the loan. Remember that in addition to the new mortgage you also have a first mortgage loan which needs to be paid off too.

Taking on a new mortgage will not in any way cancel out the first loan.  It is advisable that in case there is any difficulty with s steady income, it is best not to go for such a loan. Also, a mortgage gives the money lender the right to seize your home, sell it and then take the proceeds from it, in case you are not able to pay back the mortgage loan.

When there is a second mortgage in the picture, it means that the second money lender is also entitled to his share of whatever proceeds come from the sale of your house. Also, it is only a trend of late that the prices of houses have been on the rise thereby increasing the net value. If that trend reverses it also means that getting a second mortgage would be very difficult and also a lower net value on the house.

A ‘reverse mortgage’ is a loan which is primarily given to senior citizens, where they have to pay neither the capital nor the interest in their lifetime. The payment of the loan starts only when the owner is deceased, the house is sold or if the owner is moved to an old age home.

Such a loan however is given mostly only in the UK (where it is known as lifetime mortgage) or in the USA. In the USA however, the age to qualify for such a loan is 62 years and above. Sometimes, if a property has increased in value after taking out a reverse mortgage, is then possible to take a second mortgage also.

In the States however, only one reverse mortgage can be taken on the house. Before giving a reverse loan to a person, first a small session with the person is carried out to assess the financial condition of the person although there is no minimum income or credit requirements which are a must. However, on the other hand, the immediate money that is given should also be used to clear off any existing mortgage loans or debts.

Furthermore, since the payment does not begin in the owner’s lifetime, if there is added bankruptcy of any kind, it will only slow down the proceedings. In the States, the American Association of Retired Persons, tries to keep costs low for seniors so that they do not have additional expenses. However, the mortgage loan also needs to be approved by the Federal Government, and in the end the process of securing a loan itself could take very long.

The first step to granting a reverse mortgage loan is to assess the net value of the house, the age of the person and the existing interest rates. The age of the person may also have an impact on the person and also whether the person is employed or not.  There are also options such as getting an upfront payment, getting advances on a monthly basis or through a line of credit.

Usually unlike the other mortgage loan options that are given to people, the interest rates for a reverse mortgage are not fixed. In the case of other loans, the borrower feels an advantage when the interest rate is fixed because it also means that he would be giving the same monthly payment every month. However, in a reverse mortgage the interest rates are determined on a monthly, semi annual or annual basis. That is simply because a reverse mortgage loan has no fixed duration.

Whatever interest is accrued over the years, will simply be added to the actual capital, to be paid later. If the owner dies, after his death the house is sold and the money lent, recovered. Or else the heirs of the owner may also pay back the loan, keeping any excess proceeds for themselves. If the money is short, banks may step in to pay the difference.

However in the case of both loans, there are always plus and minus points. It is important to always think carefully about it, before actually applying for one.

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