Second Mortgages

Often, consumers refer to a first mortgage they have on a second property as their "second mortgage." However, this statement is flawed, as a residential second mortgage is actually the technical term for a mortgage loan that has been registered on title while another, first mortgage is already in place.

Generally speaking, second mortgages are offered by lenders at slightly higher interest rates than first mortgages because of increased risks associated with these types of mortgages for lenders. However, for consumers with locked in first mortgages, second mortgages can often be a much cheaper alternative to refinancing, as they mitigate any prepayment penalties associated with paying out their first mortgage. In addition, many second mortgages are offered with shorter and even open terms that allow for borrowers to make use of the equity in their homes when needed, and pay back the loan in entirety when funds become available without incurring payout penalties.

Second mortgages are particularly beneficial for borrowers looking to use funds for short term investments, to use for business purposes, to pay off high interest credit card debt, or in a market of rising mortgage interest rates. In the case of a short term investment, second mortgages allow for borrowers to immediately use the equity stored in their home(s) without incurring hefty payout penalties on their first mortgage, and be able to later return the funds without incurring hefty payout or prepayment penalties on the second mortgage.

In the case of credit card debt, second mortgages can save borrowers thousands of dollars in interest while protecting their credit score and at the same time --simplifying their lives. Replacing multiple credit card bills with a single, automated second mortgage payment helps avoid the possibilty of missing payments and damaging your credit score. In addition, with credit card debt accruing interest at rates of over 25%, and compounding daily, even if you were to take out a second mortgage with a 12.00% mortgage interest rate you would achieve significant savings each and every month.

In the case of rising interest rates, second mortgages can be extremely beneficial for homeowners looking to make use of the existing equity in their homes. For example, if a homeowner who already has a first mortgage of $319,000.00 that is locked in at 5.19% for 5 years is looking for $30,000.00 to pay for his/her children's university in a market where the best available mortgage rate is 5.99%. Which of the following would be a more appealing alternative?

Option 1: Keep the first mortgage in place with a payment of $1738.83, and take out a second mortgage at 10.10% interest with monthly payments of $260.92. Total monthly payment of $1999.75.
Option 2: Replace the existing mortgage of $319,000 with a new mortgage of $349,000 at the new interest rate of 5.99% with monthly payments of $2073.75. Total monthly payment of $2073.75.

With a second mortgage with an interest rate of even 10.10%, this homeowner saves $74.00 each month!

For more information regarding second mortgages contact one of the quaflied mortgage professionals at Alberta Mortgage or Apply Online.