The Basics of a Second Mortgage (How Do Second Mortgages Work)
Looking to remodel your home or need money to start a business venture? One way to raise funds without dealing with hassle of getting another loan from the Bank is to take out a second mortgage. Before taking out a second mortgage, it’s wise to speak with a Lawyer. While interest rates for these loans may be reasonable for some borrowers, a second mortgage comes with serious risks.
Residents living in and near Mississauga who are considering a second mortgage should engage a mortgage legal service to seek whether the second mortgage is a reasonable option or not. Contact Gujral Law Professional Corporation to get the conversation started.
Legal services provided include:
- Drafting / Reviewing with financial documents and its final execution
- Working with lenders / creditors and or their Solicitors
- Answering some of the common concerns/ questions of borrower(s)
How Do Second Mortgages Work?
Crucially, a second mortgage establishes a charge or a lien on your home or other property. This means if you fail to make your loan payments, the lender can seize the house, then sell it to recoup their money / losses.
“Second” is crucial here. With a second mortgage, the lender is second in line in terms of paying off the loan. The lender of the first mortgage gets first dibs. After that first loan is paid off, the second lender can get their money. In some situations, the first lender prohibits the second mortgage.
Lenders want to minimize risks. For this reason, most lenders extending a second mortgage will work to ensure there is enough “equity” in your home to cover the loan (or at least a large chunk of it.)
Equity is perhaps best explained with an example. Suppose you take out a $400,000.00 first mortgage to buy a home worth $500,000.00. Then, over the next ten years, you may pay the mortgage down to $250,000.00. Additionally, your home gains value and is now worth $600,000.00.
If you subtract the remaining $250,000.00 mortgage from the $600,000.00 home value, you get $350,000.00, which is your “equity.” You might take out a second mortgage worth upto $280,000.00 depending upon each lender how much risk he is willing to take, based on this equity. If you stop making payments, the second mortgage lender can feel confident that they will get paid back if they exercise the charge / lien on the home.
The details can be a bit complex. However, the crucial point is that some of the second mortgages offer relatively low-interest rates for borrowers, but at the same time, they could lose their property.
If you live in GTA or near Mississauga and need mortgage legal services, contact Gujral Law Professional Corporation. Call (647) 957-8077 to schedule an appointment.Back to Real Estate Page