SECOND MORTGAGES

What is a Second Mortgage?

You may ask, “So what exactly is a second mortgage”.   Simply put, a second mortgage is when you add an additional mortgage on top of an existing mortgage. Having a second mortgage essentially means you have two mortgages and therefore two mortgage payments.


How do second mortgage work?


Lenders will allow you to borrow up to 80% of your homes appraised value. Let us say you have a house worth $500,000, and a mortgage with a balance of $250,000.  This means you have borrowed 50% of your homes value and, assuming you can qualify, are able to borrow an addition 20% of your home value or $150,000.  If you move forward with the second mortgage you will have two mortgages. One for $250,000 and the second mortgage of $150,000 for a totaled borrowed amount of $400,000.  

          When shopping for a second mortgage (or having a mortgage broker shop mortgage for you), one of the most important factors in qualifying is the available equity you have established.   In this case you are looking for a mortgage so the equity available in your home is what matters. The term of a second mortgage is typically shorter than a first mortgage.  They are used to access funds quickly for reasons such as debt consolidation, renovations, asset splitting during a divorce, ect..  This means, second mortgages are normally paid off, in full, prior to first mortgages.


Second Mortgage Interest Rates


          Interest rates on second mortgage are often higher than that of first mortgages.  There are a few reasons for this, but the most important is that the lender of the second mortgage has a higher risk that that of a lender with a first mortgage.  “First” and “second” do not only represents the order you may have acquired the mortgage, but the terms also mean the order of which lender gets paid back “first or second” in situations of mortgage default.

          Second mortgage can differ greatly from lender to lender which makes it important to work with a mortgage professional who can explain the pro’s and con’s of each lender and help you decide what second mortgage product will be best for you.