November 10, 2023 nkad3

What is a Second Mortgage (2nd Mortgage)?

Many people often confuse the term second mortgage as a mortgage they seek when they are looking to purchase a home for the second time around, or are purchasing a second property. Others understand the term to be when you refinance your existing mortgage for a new mortgage. Both are incorrect as far as the industry recognizes the term “second mortgage/2nd mortgage”.

A second mortgage (2nd mortgage) refers to the position of the mortgage being in 2nd position, relative to the existing mortgage that is already registered against title (aka. First mortgage (1st mortgage). For example, if you have a mortgage with a lender and place a mortgage behind it (without paying the 1st mortgage off), you are registering a second mortgage. Second mortgages can come in the form of a fixed (nonrevolving loan), or a HELOC (Home Equity Line of Credit). It’s as simple as that.

Now that we understand what a second mortgage (2nd mortgage) is, we can now discuss when and why you might consider applying for one. A second mortgage can be taken for a variety of different reasons including (but not limited to) the following:

  • Your existing first mortgage is locked in a term and it would be too costly to break through a mortgage refinance
  • You need equity from your home quickly – for any reason
  • Personal circumstances have changed which prevent you from getting an approval through your existing mortgage lender
  • You need to consolidate higher-interest debt that is reducing your household cash flow

These are just to name a few. The reasons for needing a second mortgage truly are endless (and there is no right or wrong reason).

When it comes to second mortgages, we find that it’s important to consider getting them for only a short period. Since the mortgage is in 2nd position, the second mortgage lender’s security in the property is inferior to that of the mortgage lender in front. This is also why second mortgage rates are typically higher, to mitigate the risks to the lenders. Due to the higher rates, the payments on these types of loans are also higher which may cause a financial strain if it is carried for a longer period.

Exit strategy is key and we do not shy away from being transparent with clients to ensure that they have a plan and strategy in place to eventually pay out the second mortgage. If done incorrectly, a 2nd mortgage can become an overwhelming burden. If done correctly, it can help you achieve your goals and set you up for future success. If you are interested in getting a second mortgage (2nd mortgage) or would like to learn more about how they work, types of lenders, rates and costs, give us a call and we’d be happy to discuss it in further detail – (905) 455-5005

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