Financial challenges crop up even to those who adhere to good financial discipline. With the recent economic downturn, many borrowers have been pushed into debt dues due to job losses, pay cuts, business losses, etc.
Borrowers are forced to go for a second mortgage to sustain an ongoing mortgage. They are often bogged down by the complex terms of credit by private lenders. They look for professional guidance on the matter.
In Canada, borrowers choose to refinance second mortgage with North East and other such mortgage firms. There can be improved financial management due to sound professional advice.
This article takes you through the issues around second mortgage and how to go about it.
Let us begin!
What is a second mortgage?
It is a type of subordinate mortgage undertaken even while an original mortgage is still in effect. In the event of default, the proceeds from the liquidation of the property will be received by the original mortgage.
As the second mortgage receives repayment only after clearing the first mortgage, the terms are slightly different. The interest rate charged is higher and the amount borrowed will be lower when compared to the original mortgage.
Why a second mortgage?
A second mortgage is usually resorted to in the following cases
- To undertake the renovation of the house by pulling your equity.
- Poor credit score results in a denial of refinancing by a primary lender.
- A contractor or government agency can register a lien on the property in case of payment dues.
- Financial emergencies that need a quick solution.
What are the advantages of a second mortgage?
- The second mortgage allows the distressed borrower to access the untapped equity in his/her property for cash.
- Second mortgages are good quick fixes to finance a college education.
- Interest rates charged on second mortgages are comparatively cheaper than private loans.
What are the disadvantages of a second mortgage?
- There is a risk of loss of property in case of default in a second mortgage.
- A second mortgage means an additional financial burden to the borrower.
- To be qualified for obtaining a second mortgage, the borrower needs to have specified equity in the property and its value should be above a specified level.
The second mortgage loan should only be used as a quick turnover strategy to meet financial needs. The exit strategy should be to refinance or sell as default leads to loss of property. Hiring a mortgage broker can help you choose the best terms of credit and help you manage your credit score.