The difference between a first and second mortgage is simple. A first mortgage is taken out for the purchase of the home, while a second mortgage is taken out on any residual value between the outstanding mortgage balance and the value of the home. Usually, homeowners will take out a second mortgage to undertake some renovations or improvements to the property, but increasingly, people are using the equity in their homes to reduce or eliminate their high rate consumer debt. A home improvement is a good reason to take out a second mortgage, but you should be sure that the improvements you make are going to do are worth the added payments you will be making. Unnecessary home improvements, such as an in ground pool, may not be as attractive to potential buyers, and would therefore not be considered a good reason for a second mortgage. Many credit advisors recommend using a second mortgage to those consumers who are paying high interest rates on consumer debt. Typically, a homeowner would be interested in paying down consumer debt, such as credit card debt that may have interest rates of 16-20% with the proceeds from a second mortgage, which may have a rate of 5-9%. Creating more debt that is not going to either add value to your home, or reduce your present high interest debt is not a good economic decision. If a homeowner defaults on his home, the first mortgage will be paid off from the proceeds of the property. The second mortgage is not paid unless there are funds still left after the first mortgage is paid. This is the reason that rates on second mortgages are higher than on first. The bank holding the second mortgage risks that the proceeds of the home in case of default will not be enough to cover the loan. Since risk is one of the most important determinants of rates, this higher risk increases the rate. Second mortgages have closing expenses, so you should be aware of them and make sure that they do not make the second mortgage so expensive that it will not balance out the savings you envisioned. Since a first mortgage is for a substantial portion of the value of the home, it is for a greater amount than a second mortgage, so the closing costs are spread over a larger amount. The effect of the closing costs on a smaller second mortgage can be substantial. It is also important to shop around for a second mortgage since rates on these mortgages can be very different from bank to bank. Variable or fixed mortgages here: calgary mortgage rates or edmonton mortgage broker
|
