In the past few years, price properties all over the world have been skyrocketing. This is the same with the Eastern Arabia region. From 2008 to currently, house properties have surged 600% and according to developers, some parts of Bahrain have seen a 400% increase in the prices of houses. Increased revenues from foreign investments and oil has led to an increased demand for housing. This is further enhanced by the fact that housing laws are more liberal, little to no tax in the housing tax and very easy and non-stringent home financing. In this paper I will explore the financial aspects of this rise in house prices. Many banks offers lines of credit that are secured by a second mortgage on real property. There loans have been very popular among bank customers. Why are homeowners so willing to pledge their homes as security for these lines of credit?
Firstly a second mortgage acts as a second loan that one can take to secure with the home equity, which is offered on the Home Equity Line of Credit (HELOC). This second mortgage is taken from a different mortgage dealer, which allows the home owner to pay off his/her first mortgage while making payments on the first mortgage. This ensures that the whole value of the house is under mortgage. A home owner is usually allowed to borrow up to 90% of the appraised value of the real estate.
Secondly, while a second mortgage may in fact increase the cost to a home owner, the debt consolidation that a second mortgage offers is an attractive incentive for most home owners. As earlier stated, the second mortgage is secured based on the equity in the home, however these funds can be channelled to any use. The homeowner can use these funds to consolidate several debts, such as high interest credit card debt. This technique improves the home owner’s ability to save and in the process repay these high interest debt(s) at a lower interest rate that is linked with the second mortgage.
Thirdly, a second mortgage allows for a home owner to make improvements that were not originally planned. This is because the funds from a second mortgage can be redirected for any use. This explains why home owners prefer taking out a HELOC giving them the option of cashing out on the equity for their home.
Fourthly, there are some tax advantages that are associated with securing a second mortgage. As earlier stated, debts such as high credit card debts can be consolidated under the umbrella of a second mortgage. This is very important for many home owners in Bahrain, as, by law, this facet of the second mortgage gives them the power to reduce the interest rates on the second mortgage that they have chosen to take out.
Finally, a second mortgage gives a home owner a favourable interest rates. The option of taking out a second mortgage is only viable for a home owner if their savings potential surpasses the long-term costs of taking out the second mortgage loan. A homeowner needs to calculate this difference, and if the difference is positive and significant, then the second mortgage loan is a worthwhile investment.
In conclusion, the boost in the housing industry in Bahrain coupled with the favourable housing laws, encourage banks to offer offers lines of credit that are secured by a second mortgage on real property. Most banks sell these advantages to their clients despite the obvious fact of a much higher cost to financing the real property.
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