If you’re not familiar with a 2nd mortgage, it is simply a loan that is collateralized by your home as 2nd priority to your existing mortgage. These types of mortgages have become more and more popular in recent years and much of that has to do with the following reasons:
- Available equity has increased due to an increase in home prices.
- Difficulties in obtaining a financing solution via “plan A” (first mortgage with your bank)
- Difficulties qualifying through traditional means (i.e., stress test)
- Your need to achieve your goals is important and you can’t do without a solution to help you reach them.
- Ease of access to 2nd mortgage solutions with less resistance (red tape)
Although there are many benefits to taking out a 2nd mortgage, such as achieving your end goal, it is also important to consider several factors to ensure that you are certain about it is the right decision for you. Some of these considerations include:
- Purpose of the 2nd mortgage? – by clearly defining the purpose of the loan, it will help you understand your end goal and how motivated you are to achieve it. It will help you determine the amount you require so that you are not shorting yourself on the loan request or taking out more than you need.
- Cost of borrowing: many people are unaware of the total cost of borrowing, which is the true cost of taking out the loan. It includes the interest paid on the loan, but also the costs to close the 2nd mortgage such as legal fees, lender fees, etc.
- Shorter terms – 2nd mortgages tend to be on a shorter-term basis as compared to a traditional 1st These include 1–2-year terms compared to the typical 5-year terms homeowners take with their 1st mortgages. Although you can often renew your 2nd mortgage, some additional terms and conditions might apply with those renewal offers (i.e., renewal fees, increase rate, etc.).
- Exit strategy and Loan to value: 2nd mortgages are often taken out as short-term financing solutions which ultimately lead to an exit strategy (repayment in full). If you are looking to refinance your mortgage at the end of your 2nd mortgage term, you need to be conscious of your equity so that you have an available buffer for when you ultimately consolidate your mortgages. Another consideration is if there are any penalties you might encounter for breaking your first mortgage in the future. Or perhaps, you are planning to take out your 2nd mortgage with a term that aligns with your 1st mortgage, whereby you won’t get dinged with a penalty altogether.
Although there are other points of consideration, the main emphasis here is that you take a second to consider all aspects of taking out a 2nd mortgage. That’s not to say that the value of 2nd mortgages is not there, but rather that you have a clear understanding of all points before you ultimately take that decision. If you are highly motivated to consolidate your debts and have some money to renovate your home, then not only will you proceed with the 2nd mortgage, but you will do so with a clear understanding of all elements. However, if you are looking to take out a 2nd mortgage because “it would be nice to buy a new car” but not necessary, then this will help you re-evaluate your decision without going down a path you might regret later.
If you have goals that you’d like to achieve and require some mortgage financing to help you get there, give us a call so that we can discuss your circumstances and refer to your available options – 905-455-5005