2nd Mortgages are rising in popularity
Over the last 2 months I’ve had several conversations with homeowners interested in finding alternative ways to unlocking their home equity to either purchase a rental property, or consolidate debts.
When rates were significantly lower last year it made sense for homeowners to refinance their property, take out equity, and take advantage of a lower rate. But now that fixed rates are at 4.59% or greater, it doesn’t make financial sense to refinance a property: pay the penalty for breaking a mortgage, and end up paying a much higher mortgage payment.
This is why 2nd mortgages and Home Equity Lines of Credit in the 2nd position are increasing in popularity. These mortgages are a cheaper option for homeowners to tap into their equity without having to pay a penalty or disturbing their current low monthly payment.
They operate like this:
| Original Purchase Price | $600,000 |
| Original Mortgage amount | $556,000 |
| Current Home Value | $750,000 |
| Current Mortgage amount | $500,000 |
| Available Equity – (*80% of Current Home Value – Current Mortgage) | $100,0000 |
- When adding a 2nd mortgage or a Home Equity Line of Credit, we are only required to stress-test the new funds.
- Generally, this makes the 2nd mortgage an available option as long as the value of the property has increased enough.
What is a 2nd Mortgage?
A second mortgage is like a regular mortgage except it is considered to be in the “2nd position” on the property’s title. Which means should the property be foreclosed on, the original mortgage would be paid out first, the leftover funds (if any) would go towards paying off the 2nd mortgage and then finally all the remaining funds would be distributed to the owner.
Because the 2nd mortgage is paid out after the original mortgage, the lender is assuming additional risk so they lend these funds out at a higher interest rate.
Even with the higher interest rate, a 2nd mortgage or a Home Equity Line of Credit in 2nd position is often a much cheaper option than the current costs to refinance a property.
If you are interested in exploring your options to tap into your home equity to either purchase an additional property or consolidate debts and increase your monthly cashflow please don’t hesitate to reach out.
Adam Sale Mortgages
778-215-4121