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Clear the Chaos About the Concept of Refinancing Second Mortgages

Scholasticus K May 13, 2019
Refinancing and second mortgages are complex financial concepts. Though both the terms have different meanings, their integration results into a type of credit creation facility that aids transactions in real estate.
A mortgage is a term used as a synonym for the concept of collateral. The only difference is that a collateral can be any commodity or property that has significant monetary value (like a car or gold). However, a mortgage has to necessarily be a real estate. In short, a mortgage is a real estate collateral used to acquire any kind of credit or loan.

Meaning of Refinancing

Refinancing can be termed as, a replacement of current debt or loan, with another debt that has more suitable terms and conditions. In some cases it so happens that a borrower is not able to repay the lender the existing debts due to some or the other reasons, like poor financial planning, bad economic conditions.
To help the people overcome such financial difficulties, banking and finance organizations have come up with a concept that is known as 'refinancing' which is also known as 'debt consolidation loan'. Refinancing is a type of loan that has been made available by financial organizations that help people in a financial difficulty, to pay off earlier debts.
The refinancing loan is used by borrowers to pay off existing real estate loans. Refinancing and debt consolidation loans are technically congruent concepts. However the term refinancing is generally used for credit creation for real estate sector and the term, debt consolidation is more commonly used for other loans like student loans or auto loans.

What is Refinancing Second Mortgage

A second mortgage is a type of collateral that has already been pledged for another loan. Let's look into the details of this concept, lest it's confusing. A second mortgage is often applied for and sanctioned in cases when real estate is rather expensive. While purchasing expensive real estate, it so happens that one loan is not enough.
Hence consumers apply for another loan that is known as a second mortgage. The collateral of the first mortgage as well as second mortgage loan is, the purchased real estate itself. However the first loan has a greater principle (amount) and the second loan is a subordinate loan to the first one.
The first loan or the 'first position trust deed', has the benefit of priority of repayment in case of a default. It means that if the loans are defaulted by the borrower, then first has to be repaid fully before the second loan is repaid.
(It must be noted that in some nations and states, according to the laws, the first and second loans are to be repaid in the ratio in which they have been borrowed.)
Refinancing second mortgages are availed in two situations. The most common situation is where the first loan has been repaid and the borrower finds it difficult to repay the second loan. The second situation is where the borrower is unable to repay the first as well as the second loan.
The situation where the first loan is repaid is a simple situation, as the refinance second mortgage is quickly sanctioned. The collateral or mortgage of this loan is the real estate itself. The specialty of a refinancing second mortgage is that the rate of interest is low and the term or period in which the loan has to repaid is very long.
In the second situation, where the first loan has not been repaid, sanctioning process takes a longer time as lenders prefer to check on credit history. The priority of the loan still remains second irrespective of the amount.
Lenders, banks and financial institutes follow strict, procedures and checks before sanctioning a refinance second mortgage. It is always advisable to have a good credit history and complete the repayment of first loan.