When Does A Second Mortgage Make Sense?
“If You’re Looking To Secure Additional Mortgage Financing, Here’s Some Things To Consider Before Signing a Second Mortgage Commitment”
When additional mortgage financing is required for debt consolidation or other refinancing purposes, the mortgage holder has a few basic choices. They can refinance the existing first mortgage into a new mortgage or they can obtain an additional mortgage registered behind the first mortgage in place.
The two main criteria to consider when looking to refinance an existing mortgage or secure a second mortgage are 1) total net interest cost and financing costs, and 2) repayment requirements.
If for example, the prepayment penalty is going to be significant for refinancing a mortgage with a fixed interest term, the net interest cost may very well be lower by applying for a second mortgage with either a fixed or variable rate.
Second mortgages typically are offered with fixed interest terms. For a variable rate, the second mortgage tends to come in the form of a home equity line of credit secured by a second position mortgage registration.
If a borrower can qualify for either a low fixed rate second mortgage term or an equity line of credit, the decision of one of the other is going to depend on the borrower’s view of future interest rates and their plan to repay principal over time. With a line of credit, the full mortgage balance can be paid back at any time. Fixed terms can have prepayment privileges, but there will be restrictions in place.
For individuals with weaker credit, private second mortgages are typically secured to again produce the lowest net interest cost for both mortgages combined. While the interest cost of the private second mortgage could be 12% or higher, if the amount of the mortgage is small in comparison to the existing first mortgage, the weighted average cost is still likely going to be lower than trying to refinance the first mortgage with weaker credit.
The key with private second mortgages is that they tend to come with one or two year interest terms, so there needs to be a plan in place or being worked towards to payout or refinance this debt at the end of the interest term.
Because there are several variations and strategies to utilize a second mortgage financing option, its best to work with a mortgage broker to make sure that 1) a second mortgage is the right choice for securing incremental mortgage financing, and 2) the type of second mortgage program selected is the best fit for your requirements.
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel