When most people purchase a home or property, they take out a home loan from a lending institution which uses the property as collateral. This home loan is called a mortgage, or more specifically, a first mortgage. The borrower is required to repay the loan in monthly instalments made up of a portion of the principal amount and interest payments. Over time, as the home owner makes good on his/her monthly payments, the value of the home also appreciates economically. The difference between the current market value of the home and any remaining mortgage payments is called home equity.
A home owner may decide to borrow against his/her home equity to fund other projects or expenditures. The loan he/she takes out against his/her home equity is known as a second mortgage, as he already has an outstanding first mortgage. The second mortgage is a lump sum of payment made out to the borrower at the beginning of the loan. Like first mortgages, second mortgages must be repaid over a specified term at a fixed or variable interest rate, depending on the loan agreement signed with the lender. The loan must be paid off first before the borrower can take on another mortgage against his home equity.
Since the first or purchase mortgage is used as a loan for buying the property, many people use second mortgages as loans for large expenditures that may be very difficult to finance. For example, people may take on a second mortgage to fund a child's college education, or to purchase a new vehicle. Second mortgages also can be a method to consolidate debt by using the money from the second mortgage to pay off other sources of outstanding debt, which may have carried even higher interest rates.
Melbourne Finance Brokers are experts in first and second mortgage, so give us a call on (03) 9091 9490 and let’s see what we can do for you!
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