A second mortgage is a great option to access equity in your home without having to break your existing mortgage term.
It allows the existing first mortgage to remain as is and avoid any prepayment penalties.
There are two second mortgage options. One is a line of credit. It is limiting as a line of credit is only available for up to 65 per cent of the value of your home and the qualification requirements can be challenging.
The second option is a private lender who will grant a second mortgage up to 85 per cent of your home’s value.
When we refer to the 65 and 85 per cent values of your home, we are taking into consideration your existing first mortgage. As an example, a $500,000 home value will allow for 65 per cent on a credit line—$325,000.
Any existing first mortgage subtracted from the $325,000 and the balance is what is available to you as a line of credit.
For the 85 per cent second mortgage, that would be $425,000 less the existing first mortgage.
A home equity line of credit is currently available at prime plus 0.5 per cent resulting in a floating rate 3.2 per cent.
A second mortgage will be substantially higher and will involve a fee. Private second mortgages usually range from nine per cent and up, but keep in mind second mortgages are typically smaller amounts and payments are interest only.
If you are accessing the equity in your home to pay off credit card debt at 20 per cent, it puts that rate into perspective. The benefit of a private second mortgage is it is typically easier to qualify for and if your equity does not allow for a line a credit it is definitely an option to consider.
Private lenders tend to be much more flexible with requirements for qualifying with the emphasis on your property value.
A private lender is not a bank. As such, private lenders are not governed by typical bank rules and can therefore lend more money and ask for less qualifying documents and charge higher renewal or payout penalties.
This information is disclosed to you and we do recommend you work with a mortgage broker who will fully explain the terms and fees involved. A second mortgage is best as a short-term financing solution where you need access to equity in your home and all other avenues have been exhausted. Of Prime Interest is a collaboration of mortgage professionals Darwyn Sloat, 250-718-4117; Christine Hawkins, 250-826-2001; and Trish Balaberde, 250-470-8324.