By: Melissa Kuczepa
There are many reasons to consider a second mortgage. For most people, it is a matter of debt consolidation and seeing an improved cash flow in their monthly budget.
A second mortgage is placed behind your current first place mortgage holder on title. A second mortgage is always used when a refinance DOES NOT make sense. This is most often because the penalty to break the first-place mortgage is too high and outweighs the benefits. Second mortgages can be a very useful tool in accessing your equity for a short-term solution to a financial issue you face. Whether you are short for a down payment on a second property, need to improve cash flow by paying down debt, or pay outstanding taxes, a second mortgage can be a great solution, so long as an appropriate exit strategy is available.
The best practice is to structure the second mortgage so that when you reach your maturity date on your 1st mortgage, we can roll them together.
The benefit to working with a Mortgage Broker is that we review all options when you are looking to access your equity. We will determine if it makes sense to break your current first mortgage and refinance or set up a second mortgage to match your first maturity date, avoiding large penalties. It is all about strategy and what makes the most sense financially in terms of savings and cash flow improvement.
Second mortgages can be a great way to access available equity without breaking your first mortgage and paying a large penalty. We can consolidate debt up to 85% loan to value. Be mindful though, the higher you borrow, the riskier the deal appears to the lender. This will be reflected in the rate they give you. Best rates on second mortgages tend to be available to those looking to access less than 75% loan to value.
Second mortgage interest rates can be significantly less than credit cards which are typically in the 19-24% range. By using the funds to pay off high-interest credit card debt, you will improve a bruised credit score and get yourself into a better position to qualify for the best rates later. Rates on second mortgages depend on three components: credit score, equity, and repayment ability.
Second mortgage rates range from 6.99% to 12.99% and most lenders charge set up fees on top of this. All fees will be disclosed up front prior to accepting a commitment. At this point, it is very important to review debt and cash flow scenarios to make sure this is your best option.
This lower-cost financing can be used as you see fit. You can use it to pay off debt, complete renovations, inject cash flow into your business, make investments, pay for tuition, a wedding, trip, or other major expenditures.
Be aware, if you are using the funds to pay property taxes, current first mortgage payment arrears or income taxes, we will need to disclose this to the lender so they can ensure the lawyer directs the funds to have those outstanding items cleared up.
If you think a second mortgage would be useful to you, reach out today and we can run scenarios to see what makes sense!