Is a second mortgage right for you?
I don’t mean a second mortgage as in getting a mortgage on a second property; in this case I’m talking about a 2nd mortgage behind an existing 1st mortgage secured against the same property.
Second mortgages aren’t for everyone so I’m going to highlight what I think are the top 10 points you should know about them to determine if one is right for you.
1/ Get the cash you need quick
A second mortgage is a great way to access any available equity quickly without having to break the terms you presently have in place for your first mortgage. This way you will avoid any potential payout penalties associated with that first mortgage.
2/ Types of second mortgages
Basically you can get a revolving home equity line of credit (HELOC) which is secured by a 2nd mortgage behind your first mortgage. Or, the other option is a 2nd mortgage which is a separate loan with a set payment amount registered against the property.
3/ Private lenders have easier qualifying guidelines
If you are having problems qualifying for a 2nd mortgage with the lender who presently holds your 1st mortgage or any other lender for that matter, you may want to have a look at what private lenders have to offer. As you are not dealing with a large institution, private lenders tend to be more flexible when it comes to qualifying.
4/ Higher Rates and Fees
While the HELOC usually comes with favorable terms like interest only payments, an open term and a low variable interest rate, they are restrictive with their qualifying guidelines. Private second mortgage lenders tend to be easier to work with, but as they would not be paid out first in the event of a sale or a default, they are taking on a greater risk and as a result will charge higher interest rates and upfront fees.
5/ Watch out for renewal fees and increased payout penalties
Private lenders usually consist of an individual or group of individuals lending their capital out in the form of real estate secured financing also known as mortgages. Private lenders are not a bank and are not governed by the usual bank rules. This means they can ask for less qualifying documentation and charge higher renewal and payout penalties at their discretion.
6/ Short term is best
If you are having to go through a private lender for 2nd mortgage financing, I would recommend only using it as a short-term financing solution. If you have no other options available to you, know exactly what you are getting into and find out what is necessary to avoid private lending next time. You may need to fix your credit or aggressively reduce your mortgage amount in order to build enough equity to eventually combine the 2 mortgages into only one at a good rate with a reasonable payment amount.
7/ When would taking a 2nd mortgage make sense?
Most importantly, there has to be sufficient equity in your home to support a 2nd mortgage as the prime lenders such as the banks will only allow you to refinance up to 80% of the homes present value. If you are in the first year or two of a closed fixed 5-year mortgage term there may be a large penalty involved in refinancing that first mortgage in order to access more equity. Ask your mortgage professional for some cost calculations that should help you with your decision on how to best access that equity.
8/ One, Two, You
If you have a second mortgage on your home, you are third in line to benefit from any equity available once the property sells after paying all costs associated with the sale including any real estate fees. Your first mortgage holder gets their mortgage balance owing, then the second mortgage is paid out with you receiving the remainder.
9/ Who you know makes a big difference
When it comes to private financing, who you know matters more than what you know. Access to multiple private lenders instead of just one or two optimizes the best solution for your financing needs and working with a mortgage professional who has experience with both private and second mortgage financing options is a suggestion I would make.
10/ Have an exit strategy
It is usually the intention of a majority of homeowners to pay down their mortgage balances as quickly as possible and a second mortgage can only cause delays in reaching that goal. Before you commit to second mortgage financing, ensure you have an exit strategy planned in order to protect your assets.
Sound like something you would like to explore? Contact the #MortgageGirlca former banker turned #MortgageBroker. Put her over 35 years of experience to work for you! #benefitfromexperience Contact her by Phone: 780-433-8412 Email: firstname.lastname@example.org . Follow her on Facebook (MortgageGirl.ca), Twitter (MortgageGirlca) and read more of her blogs at (MortgageGirls.wordpress.com).