When I talk about second mortgages, I don’t mean it in the sense of getting a mortgage on a second property. In this case I’m talking about a second mortgage, following an existing first mortgage secured by the same property. Second mortgages aren’t for everyone, so I’m going to highlight what I think are the top ten 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 that is a separate loan on the property. The HELOC is limiting, because it is only available for up to 65 percent of your home value and has strict qualifying requirements - whereas the 2nd mortgage loan can go as high as 95 percent of your property value depending on the lender, private lenders being the most flexible.
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 by going through an independent mortgage professional. As you are not dealing with a large and potentially 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, they are restrictive in their loan-to-value and qualifying guidelines. Private second mortgage lenders, on the other hand, are more adaptable in that they know they will not be paid out first in the event of a sale or a default. Because they are essentially taking on a greater risk being paid out second, they will likely charge higher interest rates and an upfront fee. But don't worry - there are still deals to be had. Some mortgage professionals have established relationships with a private lender that afford them competitive terms. Or, some first mortgage lenders have arranged special discounted rates through an exclusive relationship with a second mortgage lender, allowing them to offer a blended product for the customer that enables them to borrow more.
5. Watch out for renewal fees and increased payout penalties
Private lenders usually consist of an individual or group of individuals lending out their capital 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. This information will be disclosed in your mortgage commitment or in the documents you sign with your lawyer. So, whichever type of 2nd mortgage lender you choose to go with, ensure you fully understand all the terms and fees involved in borrowing those funds.
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. 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 again. You may need to fix your credit or aggressively reduce your mortgage amount in order to build enough equity to eventually combine the two mortgages you have into only one, at a competitive rate with a lower payment amount.
7. When would taking a second mortgage make sense?
Most importantly, there has to be sufficient equity in your home to support a second mortgage as the “A” lenders will only allow you to refinance up to 80 percent of the home's present value. If you are in the first year or two of a closed fixed rate mortgage term, or your mortgage rate is higher than rates offered today, there could be a large penalty involved in accessing equity via breaking your term to refinance. In this case, a second mortgage could be a potential solution for you to access funds from your home. Alternatively, if current interest rates are higher than the rate on your existing first mortgage, instead of a second mortgage, you could consider refinancing your first mortgage to access home equity. I would ask your favourite mortgage professional for some savings calculations that should help you with your decision on how to obtain that equity, and if it's worth it to do so.
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 and all costs associated with the sale (including any real estate fees) have been paid. Your first mortgage holder gets their mortgage balance owing, then the second mortgage is paid out, then the fees associated with selling. Finally, you will receive the remainder as proceeds of the sale. 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 independent mortgage professional to explore the options available to you as not all HELOCs are the same. I mentioned 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, fixed and variable rate mortgages, and more. 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. In addition to access to more financing options, working with a mortgage professional who has experience with both private and second mortgage financing can also benefit you, especially if you're still unsure that it's the best solution available to you at this time.
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 an eventual refinance solution in place to avoid the renewal of your second mortgage multiple times.
By Jackie Woodward
Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects and a retired licensed, real estate broker with 30 years experience in residential real estate. He can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca
No comments:
Post a Comment