EQUITY MORTGAGE-BUILD IT UP OR PAY IT UPFRONT

2007-03-08 10:33:40

( Financial )



Equity is put up in an equity mortgage in two ways: (1) paid upfront by the borrower or (2) build up during repayment period. It is the amount owned by the borrower, which serves as cash outlay in the mortgage. It is the amount equal to the current market value of the mortgaged property less the current mortgage balance.

Equity Paid Up Front

Some lenders practice the pre-application requirement for borrowers to put up the equity necessary to process loan applications. Borrowers pay it upfront to the lender. The amount is calculated based on the value of the house and lot to be mortgaged. It is usually less than five percent of the value of the mortgage for some lenders while others allow borrowers to put up amount half of the loan. Some lenders require borrowers to only put up equity on the land. Lenders will cover the cost of house construction credited to the amount of mortgage to be repaid by the borrower.

A number of borrowers are discouraged into taking equity mortgage with equity paid up front. Difficulty in obtaining cash is usually the problem faced by borrowers.

Equity Build Up

Borrowers are not required to pay the equity up front. Instead the equity is build up during the period of repayment until the mortgage matures. Most loan applicants prefer equity build up. It is accessible and most of all affordable. Borrowers are not required to make cash outlay to be approved of loan.

Equity loan interest rates are charged higher on this type of equity mortgage. Borrower pays the full amount of the mortgage in contrast to the deducted amount paid by borrowers that paid equity up front.

Second Mortgage on Your Equity

Borrowers can apply for a second mortgage on the accumulated equity under equity mortgage. Second mortgage lends lump sum of cash with fixed repayment period. The equity is offered as collateral. Two loans are in effect at risk of not getting paid when borrowers default on repayments,the original mortgage and the second mortgage.

Second mortgage does not have priority of collection when borrowers default. The first mortgage does. To counter the risk on second mortgage, a risk premium is charged to borrowers. Thus, second mortgage has higher interest and repayments costs.


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