You will have likely heard of second mortgages by now, but I’m sure we can all agree we need a refresher from time to time as it is not always primarily on our minds until we need financial options. This article will cover some key points about second mortgages and how it may provide you with some solutions towards your financial needs.
We will cover 3 key points, so that when and if you do choose to go ahead with that decision, you will be more informed about what it entails. After all, knowledge is power! And being informed can help you make decisions that better suit your needs.
We will discuss:
– Interest rates
– Risks
– Requirements
What is a Second Mortgage and how does it benefit you?
A second mortgage is a loan secured against real estate, that is subordinate or subsequent to a first mortgage on the same property. If you own a home, there can be multiple mortgages secured against it. The order of the mortgages is determined by who registers the mortgage first with the land registry office. It is possible to secure third or even fourth mortgages against your property, however they are rare as most lenders won’t lend you money unless there is sufficient equity in your home. The reason a second mortgage is called subordinate is because if the mortgage goes into default, the first mortgage gets paid off before the second mortgage. It follows that the second would get paid off before the third.
There are many reasons why someone would get a second mortgage, but the most common are to finance a child’s education, home renovations, buy more property, or consolidate debt.
Types of 2nd Mortgages
If you’re applying for a second mortgage, you’ll be looking at two types of products.
- A home equity loan, either through a major financial institution or a private mortgage through a mortgage broker, like us. A home equity loan works like a typical mortgage. Fixed-rate loans are available in almost any increment, but the most common are 15- or 30-year loans. Adjustable-rate mortgages are usually available for much shorter repayment schedules.
- A home equity line of credit, or HELOC, that works more like a credit card, allowing borrowers to tap a revolving line of credit based on their equity. The loan has a variable interest rate and no set term.
What to note about a second mortgage
1. Higher interest rates: Because of this subordinate position, second mortgage lenders require higher interest rates due to the increased risk.
2. Defaults can equal liquidation: Assuming a borrower stops paying or defaults on a second mortgage, the second mortgage lender can initiate a power of sale even if the first mortgage is still in good standing. The opposite is also true. A first mortgage lender can initiate a power of sale action even if the second mortgage is in good standing. Each lender has the option of purchasing or assuming the position of the other lender to bring the mortgage back into good standing.
3. Require sufficient equity: Having sufficient equity (difference between market value and outstanding first mortgage) in your home is crucial if you are considering a second mortgage. It can be quite difficult to secure a second mortgage through a financial institution because they reserve second mortgages for individuals who have good credit and income to support the loan. The reality is that most borrowers require second mortgages to consolidate consumer debt or alleviate financial stress. For these individuals, private mortgage lenders are the primary source of funds.
Looking for a second mortgage? We can help. Contact me here or book a call directly into my calendar below to get started.
