SECOND LOANS Second loans, Third loans, etc are known as Junior loans, because they are Junior or Subordinate to First loans. What this means is that if you don't pay the loans and the lenders have to foreclose, the loans are paid off in or der of their priority. In fact, Junior loans have very little protection and in case of a foreclosure, they often get wiped out. This is what makes foreclosures so popular and so lucrative, because not only does the buyer at a foreclosure sale get a chance to pick up the delinquent property owner's equity, but any equity held by any Junior loan holders as well. For example, let's say that Daniel Debtor has a property worth $400,000 and he has three loans against it, totalling $350,000. Property Value: $400,000 First loan: $200,000 Second loan $100,000 Third loan : $50,000 _____________________ Equity $50,000 THE SECOND AND THIRD LOANS GET WIPED OUT If the holder of the First loan forecloses, he has no o0bligations to the holders of the Second loan or the Third loan. He is owed $200,000, plus foreclosure expenses and that is all he is worried about getting out of the property. Let's say that his expenses in foreclosing were $10,000. In that case, all he/she cares about is selling the property for at least $210,000 ansd getting his/her money back. If anyone bids more than $210,000 for the property, than any excess would go first to the holder of the Second loan, then the holder of the Third loan and finally to the delinquent property owner, but if no one bids more than $210,000 at the foreclosure sale, then both the Second loan and the Third loan would be wiped out and the buyer would walk away with $190,000 in free equity and this is what happens at foreclosure sales all the time. In order for the holder of the Second loan to get his/her money, someone would have to bid at $310,000 for the property and in order for the holder of the Third loan to be paid off compeletely, somone would have to bid at least $360,000. If anyone bid more than $360,000 for the property, then any amount over and above $360,000, would go the ex-property owner. Therefore, Junior loan holders have a lot more risk than First loan holders. The only way they can really proetct themselves is to foreclose on their Junior loans, before the holder of the First loan can foreclose. THE THIRD LOAN STILL GETS WIPED OUT The way this works is simple. If the holder of the Second loan forecloses before the holder of the First loan does, then the minimum bid at the foreclosure auction would not be $200,000, plus any expenses the First loan holder encountered in foreclosing, it would be only $100,000, plus any foreclosure expenses, let's say $105,000. But, the catch is, whoever buys the property at the foreclosure auction is still responsible for the First loan, so they are really paying a minimum of $305,000 for the property and only picking up $95,000 in equity. What about the Third loan? It still gets wiped out.The only way for the holder of the Third loan to protect him/herself, is to foreclose before either the First or Second loans. This means that the minimum bid at the foreclosure auction would then be only be $55,000, but whoever bought the property at the foreclosure auction would be responsibl;e for both the $200,000 First loan and the $100,000 Second loan and would only pick up a maximum of $45,000 in free equity. MORE RISK EQUALS GREATER COST Since Junior loan holders take greater risks, they also expect greater rewards. You can expect to pay higher interest rates to get a Second or Third loan. If interest rates are 5.25% for a First loan for example, than you can expect to pay at least 8% to 10% or more for a Second loan and still more for a Third loan, if you can even get one. You can expect to pay higher loan fees as well, if you go to a mortgage broker or a bank, as opposed to getting the Seller to carry a Second or Third loan,but this is the only way that people can people can get into the house they want. Many lenders will not loan more than 80% or 90% of the purchase price of a property, so those people who can't afford a down payment often need a Second loan to get into the property. Also, many people who want to pull cash out of a property they already own, find it cheaper to take out a Second or even a Third loan, rather than refinancing, particularly if they have a really good interest rate on their First loan. WE CAN ARRANGE SECOND LOANS, THIRD LOANS We arrange Second loans as well as First loans, so give us a call for all your loan needs. David Chodack Julian Chodack (510)827-6282 (510)414-3794 MORTGAGE MAGIC HOME PAGE CONTRACT WIZARD HOME PAGE TAX SALE RICHES HOME PAGE |
