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10 Things You Need to Know About Second Mortgages

I don’t mean second mortgage as in getting a mortgage on a second property; in this case I’m talking about a 2nd mortgages behind an existing 1st mortgage for the same property.  Second mortgages aren’t for everyone so I’m going to highlight what I think are the top 10 things 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 home equity line of credit (HELOC) secured by a 2nd mortgage behind your first mortgage or a 2nd mortgage which is a separate loan on the property. The HELOC is limiting as it’s only available up to 65% of your home value and has strict qualifying requirements while a 2nd mortgage loan can usually go up to 80% of your property value.

3. Private lenders have looser 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 through a mortgage broker. As you are not dealing with a large rigid institution, private lenders tend to be more flexible when it comes to qualifying and will work with you to find a solution that works for both you and them. Keep in mind they lend on a smaller scale so while their qualifying guidelines and document requirements are a bit looser, they tend to be more selective about the property they use to secure the mortgage. Talk to your favorite mortgage professional about how second mortgage lenders products are different than going through a typical first mortgage lender.

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, as mentioned above, they are restrictive in their loan-to-value and qualifying guidelines. Private second mortgage lenders on the other hand are more adaptable though as they would not be paid out first in the event of a sale or a default, they are essentially taking on a greater risk and as a result charge higher interest rates and upfront fee.

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. As private lenders are not a bank, they are not governed by the usual bank rules and can lend to higher loan-to-values, ask for less qualifying documentation and charge higher renewal and payout penalties at their discretion.

6. Short term is best

I recommend only using a second mortgage as a short-term financing solution. Higher interest rates, coupled with larger penalties and fees should propel you to find a less expensive financing solution if possible, though 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 “A” lenders 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 rate mortgage term there may be a large penalty involved in refinancing that first mortgage in order to access more equity. Conversely, if current interest rates are lower than the rate on your existing first mortgage, refinancing and increasing that 1st mortgage may be the best choice for you. I would ask your mortgage professional for some cost calculations that should help you with your decision on how to obtain that equity.

8.  One, Two, Me

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. Second mortgage financing reduces the equity you have in your home and you should keep that in mind if you’re selling soon and want to maximize your profits earned.

9. Who you know makes a big difference

If you’re looking for a Home Equity Line of Credit, visit your personal banker as well as a mortgage broker to explore the options available to you as not all HELOCs are the same. I mention this as some lenders have what is called a “bundled product” which allows you to access home equity a number of different ways under one umbrella. This could include lines of credit or various credit card accounts along with a mortgage. 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 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. Work with your mortgage professional on a plan that either has you paying off the 2nd mortgage financing quickly or to have an eventual refinance solution in place to avoid the renewal of your second mortgage multiple times.

 

If you’re looking for an experienced Mortgage Broker, contact the Mortgagegirl at 780.433.8412 or info@mortgagegirl.ca. Stay in the loop by following on Twitter @mortgagegirlca.

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7 thoughts on “10 Things You Need to Know About Second Mortgages

  1. Great post. I’m in the business of selling these all day every day; thus, I enjoy reading about them. As a private mortgage broker, who is your secondary target market? Me, I try to create relationships with solar PV sales reps and REALTORS.

    • Hi Tyrell, thanks for your feedback! We don’t really target a secondary market. I think we more so use second mortgages as another product offering rather than a focal point for our business.

      • That’s fair. I am not as familiar with private mortgage companies, how they cultivate leads or to whom they target. What type of licensing is required to own a mortgage brokerage?

      • Depending on the province you’re licensed in, the guidelines vary. Here in Alberta, you’re required to have at least 2 years mortgage experience before you can open a mortgage brokerage.

      • Oh OK. In US, where in located, we have the NMLS license which allows me sell 2nd’s – I’m not sure if I can sell 1st’s with it. Anyway thanks for the info. Make you follow my blog if you haven’t already. Cheers!

  2. Pingback: Renew, Renegotiate or Refinance? |

  3. Pingback: Your mortgage is up for renewal |

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