Handbook on Second Lien Loans & Intercreditor Agreements
A second lien loan is a type of loan that is secured by a property or asset which already has another loan secured against it. This means that in the event of default, the first lien holder has priority in receiving payment from the sale of the property or asset. As a result, second lien loans come with higher risks and higher interest rates than first lien loans.
If you are considering taking out a second lien loan, it is important to understand the intercreditor agreement that will be put in place. An intercreditor agreement is a contract between two or more creditors who have lent money to the same borrower. The agreement outlines the terms and conditions of each creditor’s rights and responsibilities in relation to the borrower’s assets or property.
Here is a handbook to help you understand second lien loans and intercreditor agreements:
1. Types of Second Lien Loans
There are two types of second lien loans: home equity loans and second mortgages.
Home equity loans are typically used for large expenses such as home renovations or education. They are secured against the borrower’s home and can be either fixed or variable interest rate loans. The amount borrowed is determined by the equity in the property.
Second mortgages are used to purchase a second property, such as a vacation home. They can be either fixed or variable interest rate loans and are secured against the second property.
2. Interest Rates and Fees
Second lien loans come with higher interest rates and fees than first lien loans due to the higher risk involved. Interest rates can vary based on the borrower’s credit score, the amount borrowed, and the lender’s policies. Fees may include origination fees, closing costs, and appraisal fees.
3. Intercreditor Agreements
An intercreditor agreement is signed by all creditors who hold an interest in the borrower’s assets or property. The agreement outlines the rights and responsibilities of each creditor in the event of default by the borrower. The agreement may include provisions that outline the order of payment in the event of a sale of the property or asset.
4. Risks and Benefits
Second lien loans come with higher risks than first lien loans due to the priority of the first lien holder in receiving payment in the event of default. However, there are also benefits associated with second lien loans. They can provide access to additional funds for large expenses and may offer tax benefits for use on home renovations.
Before taking out a second lien loan, it is important to consider your financial situation and the terms and conditions of the loan. Evaluate your ability to repay the loan and consider the potential risks involved. It is also important to shop around for the best interest rates and fees.
In conclusion, a second lien loan can provide access to additional funds for large expenses, but it is important to understand the risks and responsibilities involved. An intercreditor agreement is an important aspect of this type of loan and should be carefully reviewed before signing. Always consider your financial situation and the potential risks before taking out a second lien loan.