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Article 1: by Afshin Doust from YesPros Finance, vancouver bc:
Second Mortgages
What is a Second Mortgage?
As the name suggests, a second mortgage is another mortgage on your home. The term second implies that, in case you default on the first loan, this loan will not have re-payment priority. Priority is given to the "first mortgage" lender.
Second mortgages are typically useful if you plan on making major renovations to your existing home. Most homeowners, generally speaking, do not have adequate cash on hand to perform major home renovations.
Another popular use for second mortgages is debt consolidation. The problem with debt consolidation is that it doesn't address the underlying, homeowner debt problems. Many homeowners pay off their debt and then proceed to run it back up again. Not good.
Are Second Mortgages Good or Bad?
Though second mortgages are sometimes the only way to raise substantial funds, you have to keep in mind that you're borrowing against your home. In effect, you are risking your home every time you use a second mortgage. While it may be tempting to tap into the large source of equity via second mortgages, it can be catastrophic if you find you are unable to repay the loan at a later stage. When considering taking a second mortgage, make sure that whatever you intend using the funds for is worth the risk you're taking (i.e. increased equity).
Another negative aspect of second mortgages is their higher interest rates. This is the bank's way of letting you know they will be compensated for the extra risk. Sometimes, depending on how much you need, second mortgages are simply not viable because of the heavy costs involved.
Second Mortgage Costs
Even prior to putting in an application for a second mortgage, it is advisable that you work out and budget for the probable costs, which will include, of course, the monthly payment as well as an appraisal fee, application fee, and other miscellaneous costs.
You will more than likely be required to cover any remaining closing costs. Keep in mind that even if your application for the 2nd mortgage is declined, the processing costs are usually non-refundable. It is advisable to always ask for a printed list of all miscellaneous fees before putting in an application so you can better prepare.
Always compare different lenders when applying for your second mortgage. Choosing reputable, established lenders who are willing to disclose all costs upfront can save you a lot of heartache later on. Beware of lenders who offer irresistible deals but are unwilling to discuss the processing costs in detail. You don't want to end up paying more than you expected.
If you're considering a second mortgage, make sure you do plenty of research. Don't wait until you absolutely need a second mortgage to do your research and apply. Trying to scramble for a large loan will lead to oversight, overpayments, and possible penalties.
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