If you’re relatively new to the world of mortgage financing, the term “second mortgage” might cause a bit of confusion; especially if you’re a first-time homebuyer buying your first home. You might assume that when your first term is up or if you sell your first home, that the next mortgage you get would be a “second mortgage” because it is the second mortgage in your lifetime, this is not the case.
A second mortgage refers to an additional loan on a single property. When you borrow money to buy a house, your lawyer or notary will register your mortgage on the title in what is called first position or first charge. Which simply means, if and when you sell your property, your mortgage lender has first claim against the proceeds of the sale. If you happen to default on your mortgage, this is the security the lender has in repossessing your property.
A second mortgage is an additional loan, that takes the second position to the first. If you take a second mortgage, you will continue to make the payments on your first mortgage. Also, you’ll be required to make payments on the second mortgage as well. If you sell your property, the lawyers will use the proceeds of the sale to pay off your mortgages in sequence, the first position mortgage is paid out first and the second mortgage is paid out second. After both mortgages are paid off completely, you would get the remaining equity.
A second mortgage comes in handy when you’re looking to access some of the equity you have built up in your property, but you have an excellent rate and terms on your first mortgage. Instead of refinancing the first mortgage, you’d apply to have a second mortgage. Now, typically the rates on a second mortgage are higher than a first mortgage but lower than the interest rate you may be paying on credit cards, loans, or line of credits, making it a great financial debt consolidation tool. Most of the time, the loan amounts on a second mortgage are considerably less than your mortgage in the first position.
If you’d like to know more about how a second mortgage works, or if you’d like to discuss anything related to mortgage financing, please contact me anytime!