Second Mortgages – The Misunderstood Product

Second Mortgages; that word is usually followed by a shiver down the spines of Home Owners across Canada. But have you ever actually done any research on the topic to know why you’re scared of them? Albeit in most cases they are obtained by those with credit issues, however there are several instances where a second mortgage can be a very useful financial tool. Here are a couple of scenarios in which a second mortgage can be your friend:

  • Rebuilding Credit – Life Happens. We all know that, there are some things that just can’t be avoided or mistakes that you’ve learned from. Unfortunately, this has left your credit a little bruised up and some debt has built. A second mortgage lender does not typically consider credit when lending, so getting approved isn’t as difficult as a traditional mortgage. A second mortgage can be used to pay off your credit card debt and blend the interest into one, much lower payment. This will give you a chance to catch up on payments and bring your card balances down to 0. Within a year or so, your credit has slowly rebuilt itself up to “A” standards as the equity in your home has increased. You can now look at blending your existing first mortgage and second, into one new first mortgage. You have now went from bruised up credit and high payments, to 2 mortgages and a little lighter payment load, to strong credit and one first mortgage payment.
  • Renovations – In many cases, a homeowner has either just purchased a home and is looking to do some improvements or just wants to renovate their own home. However, they may not have enough equity to do a traditional re-finance as banks will only go to 80% Loan to Value. Cue the second mortgage. Most private lenders will finance up to 85% of your home value (including your existing first mortgage) and in some cases they may even go up to 90%, thus freeing up some cash for you to complete your project. With the new increased value in your home, you can now look at re-financing your second into a new first. Not a bad deal.
  • Short Term Investment – Much like the previous scenario you may be looking to take out some cash from your home, but 80% just might not cut it. You don’t want that fantastic investment opportunity to pass you by, so you look into a second mortgage. On a lot of second mortgages, you will pay interest only and a very small fee to break to mortgage. So if you have a great investment opportunity and will make the principal investment back in a short time period, this may be a useful option for you. Just make sure you have a concise strategy to pay it back, otherwise interest can add up.

We’re not saying to go out and slap a second mortgage on your house. Obviously if you have other means of handling the scenarios above, it would not be wise to pay high mortgage rates for no reason. However, under the right circumstances a Private loan can be a helpful tool to get you back on track!

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