Third Mortgage Definition
A third mortgage is a lien on property subordinate or junior to the first and second mortgages.
In the event of default on the mortgages, the third mortgage will be paid only after the first and second mortgages are paid. Monthly payments will normally be required to be paid on all three mortgages simultaneously.
Example
Mr. McGillicuddy has a home worth $300,000 with a $150,000 first mortgage and a $20,000 second mortgage. Mr. McGillicuddy needs $10,000 and a lender is willing to loan the money only through a mortgage. Mr. McGillicuddy accepts a third mortgage on the property in exchange for the $10,000 loan. The loan will be paid monthly, along with the first and second mortgages.
Though rare, third mortgages do exist on properties if the first and second mortgages are low enough in principal and sufficient equity exists to permit a third mortgage. Due to the availability of consolidation loans, third mortgages are not common. But if a potential third mortgage has favorable terms, and paying out either of the first two mortgages will subject the borrower to substantial prepayment penalties, a third mortgage can make financial sense.
When considering a third mortgage, the borrower must take into account the total of payments on all mortgages to determine whether it is feasible. This is referred to as debt service capability, i.e. the ability to make the monthly payments. If the third mortgage has a lowers interest rate than the monthly payments being made on unsecured debt, then obtaining a third mortgage may be advantageous to the borrower.
Example
Mr. McGillicuddy pays $1,000 on his first mortgage and $500.00 on his second mortgage. He also pays $500.00 on high interest credit cards with a balance of $10,000. Mr. McGillicuddy can obtain a third mortgage that will reduce the monthly credit card payment to $300.00. Even thoughMr. McGillicuddy will now be paying $300.00 extra through a third mortgage, he will reduce the payments on his monthly budget by $200.00.
It’s important to note that third mortgages are generally only provided by private, sub prime lenders and are usually offered at very high interest rates.
Please note that First Foundation does not arrange third mortgages.
If you find yourself struggling with debt, contact our licensed mortgage brokers before your credit is damaged. We may be able to arrange a debt consolidation by refinancing your home sooner than later, protecting your credit score and helping you to avoid the high interest rates of second and third mortgages.
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