When determining who has the primary rights to the value of a home, a pecking order is established. This is based on the position of the loan. The first mortgage is usually the larger of the two and is in the top position. So if you were to default on your loan, the proceeds from the foreclosure sale would go to the lienholder for the initial loan.
A second mortgage holds a subordinate position to the first loan and if there is a default on the loan it gets paid second. In fact, before the second lien holder receives any restitution, the first mortgage has to be paid in full. This is what makes the second mortgage riskier for lenders. Consequently, they come with a higher percent interest rate. In Canada, those rates can be up to fifteen percent.
An additional issue comes if you want to do something along the lines of refinancing your first mortgage, leaving the second as is. You would need prior approval from the lien holder of the second mortgage in order for a new lender to take the first placeholder position. In most cases, it will be necessary to refinance the first and second mortgage together.
When dealing with keeping a roof over your head, it is necessary to look at both sides of the equation.
- Quick access to cash- When you need money immediately, many of the vehicles available for a second mortgage allow you to access the cash available from your home right away.
- Low-interest rates- Sometimes, when compared to interest rates from credit cards, secondary financing options such as home equity loans offer very low rates.
- Use your home’s value to improve your home’s value- When done properly making renovations to your home by taking out a second mortgage can make up for added interest. It increases the overall value, makes it a more comfortable living space, and if you sell it will sell for more.
- Puts your home at risk- The greatest risk of getting a second mortgage in Toronto is that your home is your collateral. If you start missing payments because your finances change, you risk foreclosure. Your home secures your loan meaning the bank can seize your home if the second loan goes into default. The bank may then sell your house to recoup losses.
- Fees- Whenever you start a loan, you will pay fees. With a second mortgage, there are additional fees. You can expect to pay appraisal fees, loan application fees, and closing fees. All of those fees can really add up.
- More debt- The equity in your should be spent wisely, but even the best decisions cannot cancel out the fact that a second mortgage means more debt. You have to pay interest on that debt, leading to even more debt. Be extra cautious.
Chances are when you purchased your home; you put a lot of time, effort, and thought into it. Put that much effort and more into this because you are putting so much at risk. Second mortgages are great when obtained the right way and the equity is used responsibly. If you need money and own your home, look into a reputable company for a second mortgage in Toronto.