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Definition: Secondary Mortgage Loan
Secondary mortgage loan, also known as secondary mortgage financing, means getting a loan by keeping a property as security which is already mortgaged in another loan. In case of the borrower being default, the first loan will be paid off from the liquidation of the property then the secondary mortgage loan. Hence the interest on the secondary loan is higher as compare to the first mortgaged loan.
The amount of money a borrower can get as part of the loan depends on the proportion of equity the borrower has on the property and the credit score of the borrower and to maintain the low debt-to-income ratio.
The amount taken in this loan can be of two forms.
a. Lump sum: In this type of loan the lender gives a lump sum amount all at once and the borrower needs to repay the amount over a period of time with fixed monthly amount. Here fixed interest rate is applied. b. Line of credit: Here the borrower has the option to take the amount from a pool of money. The borrower can’t take beyond the maximum limit and once the borrower make payment for the last borrowing, he/she can take the money again from the pool.
Advantages of the secondary mortgage loan are
a. Loan amount: As the loan is backed by the property as a security, generally the loan amount is higher due to comparatively low default risk.
b. Tax benefit: The borrower can get tax benefit on the interest paid for the loan.
Disadvantages of the secondary mortgage of the loan are
a. Risk of foreclosure: If the borrower is not able to make the payment, then there is a possibility of losing the property which the borrower put as mortgage.
b. Cost to loan: The borrower need to incur a lot expenses for taking the loan i.e. credit check, origination fee etc.
Hence, this concludes the definition of Secondary Mortgage Loan along with its overview.
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