The Development Of A Second Mortgage

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How do second mortgages arise? In the first place, a real estate company purchases a house for resale as is or after it has been rehabilitated. It then marks up the price of the house and offers it for sale.

In this type of purchase and sale which involves a second mortgage, the market appealed to is the "low down payment" market, the person who may have only $1,500 or $1,000 or only $500 for a down payment. The difference between what the buyer pays down and the first mortgage taken by the bank or building and loan association must be supplied by the real estate company in the form of a second mortgage, which the real estate company will sell in order to get its money completely out of the house.

Closely related to this source of second mortgage is the homebuilder. In order to move his houses he may have to take back second mortgages, which he wants to sell in order to put his money back into his building business. Once in a while a builder cannot move a house; particularly in the winter months he may not be able to get along with a first mortgage and may need to put on a second mortgage.

Here the appraised value of the house is all-important, as no buyer has put any money into it. No one made any down payment, no one is obligated to make monthly payments and no one is benefiting by living in the house. The first and second mortgages may together equal the quick selling price of the house, or even exceed it.

The builder as mortgagor on the second mortgage may or may not be responsible. If he is overbuilt he may be obligated to pay on mortgages on so many houses that he can go bankrupt, and it makes little difference if he agrees to repurchase the second trust in a year's time. If he needs the money by creating a second trust now he may need it even more and not have it when at the end of a year he is called upon to repurchase.

The individual home seller may create the second mortgage in order to move his house. In these times of rapidly rising home values the banks and building and loan associations may lag in raising their appraisals of properties. If a house, which sold for $50,000 in 1958, is worth $90,000 in 1962 (and this appreciation is not unusual), it is entirely possible that the bank will not even reach $50,000 as the first mortgage limit. Few people have $40,000 as a down payment, so the seller may have to take a $20,000 or $25,000 second mortgage to sell his house. But this he does not want. Instead he generally wants to buy another house somewhere.

Title companies in every city have an "in" on this type second mortgage, which can be very sound, since they participate intimately in closing property sales. They are to be found in the phone book, and they can often put a person in touch with prospective sellers of second mortgages.

Sometimes the homeowner creates a second mortgage simply to get money to invest in something or to buy a boat or a summer place or a second car. These mortgages are hard to locate, and they suggest the homeowner may be living beyond his means. They are generally, although certainly not always, second choice investments.

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