Second Mortgages are a fast and easy way to obtain money using a home equity loan to do things like: debt consolidation, home renovations, create fast business capital if your self employed, pay outstanding bills like taxes or liens. These are great for reducing payments, paying out debts or increasing cash flow but what else should you consider?
Rates on Private 2nd Mortgages
Consumers are fixated on rates, this shouldn’t be a surprise but as a mortgage professional we can or should be able to see a larger picture.
Take for instance a blended rate. What is a blended rate you might ask? By looking at your 1st mortgage balance and rate and considering a smaller second mortgage usually at a much higher rate you can compare your blended rate. Here is a link to a blended rate calculator.
Example of How a Blended Rate Works
Look at it this way, your 1st mortgage is larger (lets use $350,000 as an example at a rate of 3.25%) and you are looking for a 2nd mortgage which is usually smaller (lets use $50,000 as an example at a rate of 10%) your Blended rate between the two loans are 4.09%. So why are you focused just on the 2nd mortgage rate at 10%? It’s a smaller amount of money.
Costs in Breaking a 1st Mortgage (IRD)
Now consider what is the penalty of breaking your 1st mortgage? Most Fixed mortgage terms have an interest differential penalty (IRD). This penalty can be many thousands of dollars depending where you are in the term and the interest rates offered by your bank.
Costs associated with a 2nd Mortgage
Now 2nd mortgages do have a higher rate of interest depending on the loan to value. As well there are legal costs such as title insurance, Insurance Binders plus strata Form B’s if you are in a strata or bare land strata. Onto of this Mortgage Brokers do not get paid by the lender so the borrower does have to pay a fee associated with 2nd mortgages financing. In a lot of cases these costs of doing a 2nd mortgage are a cheaper option than breaking the term on your 1st mortgage.
What a mortgage expert should be doing when looking at your application:
- Review the length of term left in your 1st mortgage to determine if its in your benefit to refinance now or obtain a 2nd
- Review your credit to see how long you will require funds if you have poor credit.
- Consider what lender would work best. (some lenders work with clients longer who have a history of late or missed payments while others have little patience for this type of borrower) Of course costs and rates will be higher for lenders that offer a more patient approach but the over all savings of a lender not renewing is usually far greater.
For a review of your situation feel free to call us.
