Second mortgage vs. mortgage refinancing
What is a second mortgage?
A second mortgage is a loan secured by a residential or commercial property. This loan takes second position—after the first mortgage—on the property used as collateral. A homeowner or business owner can easily obtain a second mortgage when the equity in their property is high enough relative to the balance of the existing mortgage. By leveraging the equity already accumulated, property owners can use their home or building as collateral to access additional funds through a second mortgage.
Has your property’s value increased recently? Have you nearly finished paying off your first mortgage? If you answered yes to either of these questions, a second mortgage might be the right option for you.
Why choose a second mortgage instead of refinancing?
1.Avoid the prepayment penalty on your current mortgage
Breaking your current mortgage to refinance your property could result in costly prepayment penalties. These can range from three months’ interest (for a closed variable-rate mortgage) up to 10% of your mortgage balance (for a closed fixed-rate mortgage).
For example, if you have 36 months remaining on a $400,000 mortgage at 4.39%, and the current annual interest rate is 2.99%, your prepayment penalty could be around $16,800.
By choosing a second mortgage, you won’t need to break your existing loan—allowing you to save thousands in penalties.
2. No debt ratio or credit score requirements
If you choose to refinance your current mortgage, you’ll need to go through a rigorous qualification process and meet the bank’s debt ratio and credit score requirements. Many people can’t qualify under those conditions.
However, when applying with a private lender, the approval process for a second mortgage is typically based solely on your property’s value. Your debt ratio and credit score usually aren’t part of the criteria.
Although you might incur additional notary fees when obtaining a second mortgage, these are often lower than the prepayment penalty on your existing mortgage—and the process is usually much faster and simpler.
If you have any questions about private mortgage solutions or would like to apply for a second mortgage, feel free to contact me at maxime.st-laurent@financierevictoria.com.
Recent article: Second Mortgage: 3 Reasons Why You Should Use It to Consolidate Your Credit Card Debt
