First Mortgage vs Second Mortgage

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First Mortgage vs Second Mortgage

Did you know you could have more than one mortgage at the same time? Depending on how much equity is in your home, a second mortgage might be a good option for a low interest loan.

What’s the difference between a first mortgage and a second mortgage? Let’s find out and look at the advantages and disadvantages of both.

First Mortgage

A “first mortgage” is what most people think of when they hear the word mortgage. It’s traditionally done through a bank, but can also be done with the help of a mortgage broker. Investopedia defines the term as: “a first lien position on the property that secures the mortgage. A first mortgage has priority over all other liens or claims on a property in the event of default.” In other words, this type of loan ranks as most important if a homeowner gets into financial trouble.

There are advantages of having a traditional first mortgage with a bank. It can be convenient to have your loan set up with the same institution where you do your daily banking. They are available at just about every bank or credit union. It’s a pretty common situation, as most Canadians buy their first home with the help of a mortgage. Interest rates are generally pretty low on first mortgages.

There are a few disadvantages to only having a traditional mortgage. As you pay it down, you don’t have access to your equity unless you set up a new loan, like a line of credit. Canadian banks use income to determine if you qualify for a mortgage or other loan. Even those with a small fortune tied up in their home can be refused if their income is considered low by the bank. The bank’s formula for calculating loan worthiness is much stricter than other lenders – banks just aren’t very flexible.

Second Mortgage

Second mortgages aren’t as well known, but are gaining in popularity. They are simply a second loan which is taken out even though a traditional mortgage is already in place. They are a secured loan, which means they are backed against an asset – usually your home.

The most popular source for a second mortgage is through a mortgage broker. Brokers can use the home equity to qualify owners for a low-interest loan. Many Ontarians are choosing to take on a second mortgage to help them accomplish their financial goals.

There are many advantages to getting a second mortgage with a broker. Income isn’t as important, as the loan is secured against your assets. Brokers shop around to get their clients the best possible rates. Repayment plans can be quite flexible. Depending on the reason for the loan, options can include regular monthly payments or interest only fees. Second mortgage payments tend to be small and easy to manage. They can be used in place of higher-interest loans, such as credit cards or car loans.

The biggest disadvantage to a second mortgage is that it’s still a debt. Homeowners have to be careful not to overextend themselves and take on more loans than they can afford. For more information on second mortgages and if they are right for you, please visit our Second Mortgages page.