What is a Second Mortgage?
Share This Page
Definition of a Second Mortgage
A second mortgage is a mortgage taken after a first, or primary mortgage is in place, without removing or altering the terms of the first mortgage.
A second mortgage is a common way of financing when the property owner has available equity in the property. A second mortgage can either be a home equity line of credit or a private mortgage. In both cases the property owner’s home is used as security and in the event of default, the first mortgage will be paid before the second mortgage .
Mr. McGillicuddy has a house worth $250,000, and a first mortgage of $150,000 on the property. He needs repairs to the property costing $20,000. Mr. McGillicuddy takes out a second mortgage to finance the repairs. Mr. McGillicuddy now has 2 mortgages on the property, totaling $170,000, with a remaining $80,000 in equity. Mr. McGillicuddy will now have two mortgage payments, a larger payment on the first mortgage, and a lower payment on the second mortgage.
The money received by the property owner in exchange for the mortgage can be used for a wide variety of things, including home additions, repairs or improvements. However, the proceeds of the second mortgage may not relate to the property at all, it might be used to pay off high interest credit cards, car loans, signature loans or consolidation of these types of debt.
Is a second
mortgage or a refinance better for you?
Advantages of a Second Mortgage
In most cases, if the second mortgage is a home equity line of credit (HELOC), it will often have a lower interest rate than other types of financing, such as credit cards and unsecured signature loans. This is usually because the mortgage lender is provided some protection by being given security in the home.
If we look at the $20,000 second mortgage example above and the owner is able to obtain a second mortgage at 5% interest, the monthly principal and interest payment will be approximately $106.74, based upon a 30 year amortization period. On the other hand, a $20,000 credit card obligation at 12% interest would have a minimum monthly payment of at least $500.00, and most likely higher.
When considering a second mortgage. the potential buyer should consider the equity in the property. If there is no equity in the property the buyer is unlikely to be approved for a second mortgage. Another thing the borrower should consider is whether a second mortgage payment is within their monthly budget. A second mortgage that the borrower cannot pay can place the entire property at risk.
At First Foundation, we understand that considering a second mortgage on your property is a serious decision to make. We will be glad to analyze your financial condition and help you decide what second mortgage products may be available to you.Source: www.firstfoundation.ca