2 obvious reasons to opt for a second mortgage versus refinancing your first mortgage

2 obvious reasons to opt for a second mortgage versus refinancing your first mortgage

First, what is a second mortgage?

A second mortgage is a second lien on a property, residential or commercial, that already has a first mortgage registered. Second mortgage loans sit in the second position on the property, behind the first mortgage loan. A home or business owner can obtain a second mortgage easily once they have built up enough equity in their property. Second mortgages allow property owners to withdraw money from the accumulated equity without impacting the first mortgage.

Has your property value recently gone up? Or do you nearly have that first mortgage entirely paid off? If the answer is yes, a second mortgage may be an option for you.

Here are the obvious reasons to opt for a second mortgage versus refinancing your first mortgage:

1. Avoid mortgage prepayment penalty of your current mortgage

By breaking your current mortgage to refinance, you are exposed to a prepayment penalty, which could range from as little as 3 months of interest in a case where you have a closed variable rate mortgage, but can reach as much as 10 per cent of your mortgage balance, if you have a closed fixed rate mortgage. Let’s say there’s 36 months left before the maturity date of a $400,000 mortgage loan signed at 4.39% and the actual posted annual interest rate is 2.99%. Your prepayment penalty would be approximately $16,800. By opting for a second mortgage, you won’t have to repay your current mortgage, and you’ll save on prepayment penalty.

2. No debt-to-ratio and credit score requirements

If you opt to refinance your current mortgage, you will have to go through a tough qualification process and comply with the bank’s debt-to-income ratio and credit score requirements. This could affect your chances of getting a second mortgage pretty quickly. If you apply for a second mortgage with a private lender, your debt-to-income ratio and credit score won’t be part of their qualification requirements. Qualification for a second mortgage will normally be based only on the value of your property.

Obviously, this applies for a second mortgage with private lenders, as conventional banks that are offering second mortgages will require you to comply with their standard debt-to-income ratio and credit score requirements.

Even though you may incur additional notary fees for getting a second mortgage, most of the time, those fees are inferior to the prepayment penalty of your current mortgage and that mortgage is way easier to obtain. Do you have additional questions related to second mortgages, or are you currently looking for a second mortgage? Contact me at maxime.st-laurent@financierevictoria.com

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