How Second Mortgages Work - The Basics
Second mortgages aren't much different than first mortgages, but there are a few differences...
When thinking about first and second mortgages, the meaning of first and second comes down to the position on title to the house. A first mortgage will be in first position, and a second mortgage in second, there are even third mortgages. First mortgages are generally secured by banks or credit unions at low interest rates. Let's say currently 2.59% for a 5 year fixed mortgage. Where as second mortgages may range from 4.99%-19%, third mortgages can be higher yet.
Second mortgages are more expensive because they are inherently more risky for the lender. In the case of a foreclosure, the first mortgage lender gets paid out before the second lender does. Because of all the costs involved in a foreclosure, equity is eaten up quickly in legal fees, realtor fees, and the list goes on. It is possible that a second lender may actually lose money in the case of a foreclosure. First mortgages are almost always insured by CMHC, Genworth, or Canada Guaranty. Where as second mortgages are virtually never insured.
Because of these additional risks to the lender, the interest rate is higher. You'll notice above I mention a second mortgage with a rate of 4.99%. Be sure to read the fine print, this may be your interest rate, but there will be a large setup fee, in the end, your APR will still work out about the same as a 12-13% second mortgage. It's sort of "gimicky" in that regard, but looks good on paper.
A very typical second mortgage may be anywhere from $15,000 - $50,000 or more, with an interest only payment on a one year term. Going rates are normally 12-14%, with a 3% lender setup fee.
Second mortgages are generally given by a Mortgage Investment Corporation, Private Individual, or Trust Company.
Second mortgages are generally used to payoff debt (debt consolidation), but can also be used for renovations, paying for kids school, or to get through a difficult time in the event of loss of job or other such events.
Before you sign on the dotted line with another mortgage broker, be sure to check with us. We'll give you a fresh opinion on whether your mortgage (1st, 2nd or even 3rd) is a good idea, or if there is a better solution.
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