Getting a second mortgage is a great temporary solution to getting rid of high interest debt, eliminating judgments or to simply increase liquid cash. Surprisingly, a second mortgage or secured line of credit (also in the form of a second mortgage) is far safer than any unsecured loan. When making the decision of registering a second mortgage, consider the following things:
- Second Mortgage Rate
Are you comfortable with the second mortgage rate? If you are, in comparison to your other debts, it will make sense to follow through with the second mortgage. If you are not comfortable with the second mortgage rate, create a comparison chart of current expenditures vs. consolidating that debt with a second mortgage. This will help better weigh your options and visualize which option makes the most financial sense. On most occasions, the second mortgage rate is much lower than the rates of credit cards, personal loans, etc.
- Judgments/Liens
If you have any judgments against yourself, or liens against the property, it will affect the likelihood of getting approved for a second mortgage. The reason for this is because judgments or liens usually take the form of a second mortgage. To register another mortgage would then mean the lender would have to accept third position (essentially this would become a third mortgage with a higher mortgage rate) and most lender do not feel comfortable doing so unless the loan-to-value is very low. It is beneficial to clear up any judgments or liens prior to applying for the second mortgage (through borrowed funds, savings, etc.) to avoid any complications. Since the lenders usually provide a lump sum of the money you request, any high interest debts that concern them may be mandatory to pay off through the redirection of the funds. If this is the case, it will be expressed to you before any commitment is made.
- Timeline
It is important to know that second mortgages are usually great short term solutions. It is common to have a second mortgage from 6-24 months. If you are in need of the second mortgage funds for longer than 2 years, it may be better to consider other options, such as a refinance to pull out your equity. This rule applies to private lenders; however institutions will lend second mortgages in the form of secured lines of credit for longer periods of time (as long as your request meets their guidelines).
- Current First Mortgage
Second mortgage lenders are interested in the activity of your first mortgage. They don’t need to see a history of every transaction make, however, they do need to know that your current first mortgage is in good standing (no late payments/no arrears). This will help them feel comfortable with their investment. If your current mortgage is in arrears, a reasonable explanation can be presented to avoid having the lenders back out. It is up to the lenders discretion to continue with the second mortgage given knowledge of the arrears. It is a good idea to bring your first mortgage into good standing before we as the brokers submit your application.
Aside from these points, it is also important to be prepared to submit any supporting documents that the lender may request. It is unlikely that they will request as much as the banks, however they may request certain documents for their records. A poor credit score has less bearing on your chances of obtaining a second mortgage than a first mortgage. Depending on the lender (some may require these things, some may not), they may need an appraisal and credit check to be done. At Canadian Mortgage Services, nothing is a secret to our clients. We disclose all information before proceeding with the application so that you as the client are not thrown off-guard. We will guide you through every step of the second mortgage process with thorough explanations to your questions or concerns.