Second Mortgage FinancingAn investor should consider secondary mortgage financing when dealing with low-risk opportunities, that are characterized by high net operating income, which can cover debt service for both a first and a second loan. This financing technique will allow the investor to further increase the benefits of leverage and achieve higher return on equity. The second mortgage loan is subordinated to the first mortgage. This means that when the borrower defaults, the first mortgage needs to be paid off before any amount is paid to the lender of the second loan. Depending on the type of lender we can distinguish second mortgages to commercial and institutional. Commercial mortgages can usually be obtained from mortgage companies, commercial finance companies and Real Estate Investment Trusts (REITs). These mortgages are typically short-term, and are more flexible than institutional mortgages, as they allow prepayment, high loan to value ratios and lower debt coverage ratios. Institutional mortgages are usually obtained from pension funds or life insurance companies, and are typically characterized by lower interest rate and longer terms. A purchase money mortgage is a mortgage taken by the seller. This is often used when the buyer does not have the required equity or he can not secure a second loan from institutional or commercial lenders at terms that he can live with. The purchase money mortgage is often referred to and as seller financing. In essence, the seller instead of receiving a lamp sum payment is accepting to receive the payment in installments at an attractive return for his capital. A seller maybe motivated to offer a purchase money mortgage for several reasons including facilitating the transaction, locking a higher selling price in exchange of accepting to take paper instead of cash, and/or securing a high and low-risk return on his capital.
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