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 The
Money Management Newsletter: Home
Ownership
Second mortgages - taking a second look
Home Ownership Editor & OCNA
Special to Money Management Newsletter
Second mortgages have always been perceived as
an inferior option when it comes to financing a property. Most people
think that you only take a second mortgage when you cannot get a bigger
first. But, there are often times when a second mortgage is a lower cost
option for a buyer than arranging a new first mortgage.
Over the last several years, almost all financing has
been by way of a first mortgage. That's because it has been cheaper to
arrange a new first than to assume an existing first and put on a second
mortgage. Because a second mortgage stands in second position to a first,
it naturally is at greater risk, and hence, commands a higher interest
rate than the first. However, if the interest rate on an existing first
mortgage on a property is significantly lower than the rate of a new first
mortgage, then it may pay to assume the first and take out a smaller second
mortgage to complete a purchase or refinancing.
Any good mortgage broker or real estate sales person
can calculate the weighted average interest cost for a first and second
mortgage combined as compared to a new first mortgage. If the new first
mortgage is a high ratio one (greater than 75 per cent of the appraised
value), then the borrower will also have to pay insurance costs. These
should be factored into the comparison as well. When the gap or interest
rate differential between the new first mortgage and existing first mortgages
that can be assumed is greater than 2 or 3 per cent, then you will start
to see more second mortgages being arranged in our marketplace. And that
day is closer than many think.
Finding a lender for that second mortgage can be as
simple as finding a mortgage broker in the yellow pages. Perhaps asking
a relative for assistance or even your family layer or financial advisor(s)
who have contacts with investors, that can provide such financing. The
mortgage broker works on commission, so ask how much the fees he charges.
Shopping for rates is a little harder than the first
mortgage rate tables in the newspaper or within this website; you may
have to call several lenders to get a idea of current rates - that's why
a broker is the easier option . Each Lender needs to evaluate the property
and the added risk, in much the same way as a first mortgage. Finance
companies also offer second mortgage facilities. It's always best to review
the second mortgage terms and conditions with a qualified professional
before signing on the dotted line.
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