What are first and second mortgages?
Investing in mortgages and mortgage investments come in different levels. At every level, the likelihood of risk will grow, as well as the potential reward.
For the most part, a first mortgage is the first mortgage that a borrower will secure for the purpose of buying a property.
A second mortgage can be viewed as a further loan after a first mortgage has been obtained; it is usually a secured loan, which means that you can use the equity in your home as collateral.
The loan-to-value (LTV) ratio of second mortgages is generally higher than that of first mortgages, which generally have a ratio of 75% or less.
There are cases when the loan-to-value ratio of second mortgages ranges from 75%-85%.
Some of the common reasons people take out a second mortgage on their home is to renovate it, consolidate their debts, or even pay for their kids’ education.
An individual shopping for a second mortgage is likely to find a higher interest rate than the first one, even though a second mortgage is often a better deal than a line of credit or a credit card.
Is there a risk of investing in second and third mortgages?
In addition to the risks associated with a first or second mortgage, there is also a benefit involved.
When a borrower defaults on a first mortgage, the lender will be the first to be paid back after taxes. In short, investing in first mortgages is a lower risk because if the house goes into foreclosure, it’s more likely that you’ll receive a payout.
In the case of a second mortgage, you’ll likely be second in line.
The sale of the property may not generate enough money to cover all outstanding loans in case of a default by a borrower, and you will not get your entire investment back once the taxes and first mortgage have been paid off.
Therefore, a second mortgage carries a greater risk. A second mortgage comes with a higher interest rate, so you may earn a larger return on your investment.
The mortgage investment pool is what you invest in when it comes to mortgage investing. This pool includes several mortgages or accounts.
Furthermore, the risks associated with investing in a single residence are reduced by investing in multiple loans through a mortgage pool.
The kinds of mortgages included in the pool are also important to know. As the number of second mortgages increases, the risks and potential rewards are higher.
However, investments in mortgages, like any other form of investment, require an investor who knows their level of risk tolerance.
For those tired of conventional investment strategies, mortgage investments are a viable investment option.
Nevertheless, it is important to understand your personal risk tolerance levels prior to investing. The team at Northwood Mortgage is here to assist you in gaining insight into the world of mortgage investment and how you can make use of it.
Contact us today to discuss how we can help you achieve your goals and provide you with a customized plan that fits your needs.
If you need expert mortgage investment services in Toronto, or if you’re simply looking to consult real estate mortgage experts about your potential future home, you can visit Northwood Mortgage. You can call us at 888-495-4825 or contact us online