A second mortgage is simply another charge on the property that already has an existing first mortgage, and therefore falls in second position to claim it’s interest. Second Mortgage lenders could be either Institutional or Private lenders. For a lender, this is a riskier position because the first mortgage lender has first claim to the property, and the second mortgage lender must wait for the first to act. In case the borrower has defaulted on their mortgage payments, and if the second lender wanted to be in control to protect it’s interest, they would have to make the mortgage payments to the first mortgage lender while they pursue their rights under the mortgage to protect their interest. For this riskier position a Second Mortgage lender assumes, they often charge a higher interest rate on their mortgage.
Under what circumstances would a borrower would consider Second Mortgage? There are many reasons – some make more financial sense, while others may be the only option in raising the necessary and needed funds.
• The First Mortgage is closed, and penalty is too high to break and refinance into a new first mortgage
• Borrower’s credit rating is very low and doesn’t meet the first mortgage lenders’ criteria
• Borrower’s income does not meet the debt servicing ratios criteria
• Borrower is self-employed and requires up to 90% financing on their purchase, but doesn’t meet the lender’s and insurer’s income and credit criteria
• Borrower has numerous high-interest debts (credit cards, loans, lines of credit) that are too costly with the monthly debt burden no longer sustainable > refinancing these into a Second Mortgage will provide the payment relief to allow homeowner to continued homeownership.
• Borrower’s credit rating has been seriously downgraded due to the numerous credit facilities being over-utilized, and many missed payments placing them in serious default situation. With a consolidation of these into a second mortgage, paying off of these credit facilities will provide the necessary payment relief, and clean up the maxed credit items. Going forward, in coming months, the credit rating should increase systematically, and one day in the near future, that borrower will be able to be refinanced under a first mortgage with better rates.
We typically do an assessment as to which is the best and least costly option for our client – whether refinancing into the existing or new First Mortgage, or simply arranging for a Second Mortgage. If you would like to examine your unique and personal situation, please contact Homefund for a professional overview of you options.