In many home sales, particularly in cases where the purchaser wants to assume a seller's existing mortage, a buyer will not have enough cash to close the deal. In such cases, a purchaser often will seek second-trust financing.
A second trust is a loan secured by the property. If the purchaser fails to make the monthly mortaged payments and the property is foreclosed, the house would be sold and the money paid out to the creditors. In order, the creditors likely would be the government (for taxes), a lender (for the mortgage or deed of trust) and then the holder of the second trust. If all the money from the foreclosure were used to repay the government and first lender, there would be nothing left for the owner of the second trust.
The order of repayment in the event of default means the second trust has more risk than a common mortgage, and therefore the rate of interest is higher. Also, although a mortgage usually has a term of 30 years, a second trust generally is limited to 3 to 10 years. This means that either the monthly payments will be far greater than a similar note stretched over a longer period or that a large sum will be due at the end of the term. This large sum is called a balloon payment.
The rules governing second trusts vary extensively in each local jurisdiction. It is wise to consult with an attorney before agreeing to any second-trust arrangement. As an example, in the District, a second trust showing a rate interest of 8 percent or more must have equalk monthly payments. Such a note cannot be sold be the makenthly payments. Such a note cannot be sold by the make