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The Money Management Newsletter: Home Ownership
Second mortgages - taking a second look

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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