Second Mortgages

A second mortgage can be useful when the penalties for breaking an existing first mortgage are high. A second mortgage can also help you free up some cash if a home equity line of credit isn’t available. This is why a second mortgage is sometimes called an equity mortgage.

Quick Facts About Second Mortgages

The second mortgage cannot exceed up to 75-80% of the amount of equity you have in your home.
The interest rate is always higher on a second mortgage, and the amortization period may also be shorter than that typically offered for a first mortgage. Your credit score will impact how much higher the rate is.
Your home acts as security for the money you borrow, no matter what you use the money for. This means that if you fail to pay your second mortgage, the lender can foreclose even if you are currently on your first mortgage.
Second mortgages are often used to pay off high interest debts such as credit cards.
Some borrowers use their second mortgage to trade their first mortgage for one with a shorter term.
Second mortgages can have a term for anywhere from 1 to 35 years, depending on the lender.
Some borrowers use a second mortgage to pull equity out of their home in order to invest in an RRSP or RRIF. This strategy may reduce current and future taxes.
It may cost less to obtain a home equity line of credit (HELOC) or to refinance your first mortgage, so calculate all the costs involved before taking a second mortgage.
Because a second mortgage still has a lower interest rate than most credit cards and car loans, some borrowers take out a second mortgage for major purchases.
Closing costs on a second mortgage can add up to anywhere from 2% to 10% of the amount you borrow. Typical costs include the appraisal fee, legal fees, a title search, title insurance and a home survey. There may be additional costs as well, depending on the lender.

Qualifying for a Second Mortgage

The process of applying for a second mortgage is very similar to applying for a first mortgage. The lender will seek the same types of information to support your application. See Information the Lender Wants From You.

In addition to this information, the lender will need proof that you have more than 20% equity in your home, and that your total debt service ratio (TDS) is within the lender’s requirements. If your credit rating is below 680, you may still qualify for a second mortgage, though the interest rate will be adjusted upward to compensate for the lender’s perception that you are a higher risk.