Considering a second mortgage in Toronto as a refinancing option or a way of making up the difference on a down payment? Confused about interest rates and PMIs or PITIs? Keep reading for a list of frequently asked second mortgage questions and the answers you need to help in making wise mortgage decisions.

What can I use a second mortgage for?

Most first-time home buyers in Toronto use a second mortgage in conjunction with the first mortgage as a way of making a down payment on their first home and avoiding the high costs of private mortgage insurance.

On the other hand, established homeowners use second mortgages as a way of tapping into the equity they’ve grown in their home and paying for expenses like cars or college tuition without the high-interest rates charged on high personal loans.

Can a mortgage lender charge me a higher interest rate if I’m obtaining a second mortgage from a different lender?

There is no valid reason for a first mortgage lender to charge a higher interest rate because the borrower is also obtaining a second mortgage. Most lenders do not charge a higher interest rate when a second mortgage is involved.

Having a second mortgage makes the first loan safer. The reason is that both the borrower and the second-mortgage lender are interested in keeping payments on the first loan current. If the borrower defaults, the second-mortgage lender often makes the payments on the first loan to avoid being wiped out by foreclosure by the first lender.

I can get a second mortgage. If I opt for a balloon mortgage, should I do it?

If you don’t pay off the balloon payment when it’s due, you would either lose the house or have to sell it. If you have to get a balloon mortgage, opt for one with a longer-term loan so you have more time to refinance. Your goal is to sell, renegotiate or refinance the mortgage with another lender before that major balloon payment is due. Otherwise, you could be in hot financial water.

If the first lender doesn’t know about the second mortgage, is that legal?

An unrecorded or “silent” second mortgage is essentially fraud on the first mortgage lender. It does happen in the real estate market, and lenders will rarely prosecute the lender, seller, or borrower. However, an unrecorded silent second mortgage can be dangerous for you. If you don’t record it and if the lender doesn’t honor your payments, you don’t have the legal backing of a recorded and secured mortgage.

What are the advantages and disadvantages?

There are advantages and disadvantages to 2nd mortgages. Second mortgages can help repay your debt. It can also help finance your high education costs. It can also help save some money in tax by claiming the interest on the loan as a deduction in the itemized deduction. Interest on a second mortgage can be tax deductible up to $100,000 of the loan amount. According to industry experts, many times fixed interest rate of a second mortgage allows you to save up to 3 times more than the minimum payments on credit cards. Always consider refinancing your second mortgage into your first when possible.

Some of the disadvantages of 2nd mortgage are that it comes with a higher interest rate than the primary or the first mortgage. Since the second mortgage will not be paid until the first mortgage is paid in case the borrower defaults. the second mortgage is often riskier for the lenders. The second disadvantage with a second mortgage is it comes with hefty fees. So it is often advisable to ensure the intended use of the second mortgage is well worth the risk. Second mortgages can often be found with either your existing bank or from your primary mortgage lender.

The first thing that you need to realize while thinking about your finances is that what works for one might not for another. The applicability of the solution depends on your financial situation. The same thing applies to refinancing, especially when consider a loan and location like a second mortgage Toronto, ON.

Why refinance your second mortgage in Toronto

Refinancing your second mortgage is a good option if you are looking at reducing your monthly payments or merging your first and second mortgages into one single loan with one single repayment. It can help you get a better interest rate, which will have a huge impact on your monthly payments. This can also be a good way to deal once and for all with the private mortgage insurance to cut costs if you have the funds to lower your loan amount and improve your over all cash flow.

How to go about a second mortgage refinance in Toronto

The first thing to do is to establish whether refinancing is the right thing to do in your current financial circumstances, generally with the assistance of a mortgage broker. There are many mortgage calculators available on the internet that can help you assess this decision – but nothing compares to working with an industry professional.

You must be in a sound financial condition, or enough for it to make sense to refinance for a lower payment with principal being paid off. Look at your credit score and if you feel there is anything that is affecting it negatively, try to get it fixed. Your credit score is one of the most important factors in determining the interest rate that you’ll be offered by the lender. Maintain a healthy savings balance, if possible to be able to manage the payments on a monthly basis. Having savings is important, as there are closing costs that are associated with refinancing, that you can pay for, or take out from the equity, and the lender must be convinced that you are in a position to cover them.

The next step is to find lenders who can provide you with the required information regarding refinancing your second mortgage – do this with the help of a mortgage broker. Find out information about their refinancing options and the process involved from the broker that will be able to assist you and provide various second mortgage options.

Then comes the most crucial step of the process, which is a comparison of all the available offers. Not all refinancing offers are equally suited to everyone. Work with your broker to assess them based on your financial situation and what makes most sense in your end goal.

Once your broker finds a suitable offer for you, all you need to do is to take care of the paperwork and the broker will determine the amount of money you need for the closing costs, which will be put in writing prior to closing. Knowing all the terms and conditions under which you have been refinanced is vital. Sign the documents only if you agree with the consequences of all possible scenarios, along with a consultation with a real estate lawyer.

Things to bear in mind

Loan offers have to be scrutinized, as there could be several disagreeable things hidden in the fine print. Shopping and comparing loan offers is very important if you want to end up with an offer that satisfies you.

Go for the loan offer that gives you a low rate of interest. This is because the higher the rate of interest, the higher are the monthly installments. But do pay attention to other fees as well. Talk to your broker and second mortgage lender, if possible, and see if you can get the title fee or the appraisal fee waived.

Refinancing your second mortgage in Toronto is not rocket science. Just make sure that you are familiar with the process and the terms and conditions involved so that you can land a good deal.

Mortgage brokers in Toronto are usually more flexible with these loans because your home is placed as collateral giving them a valuable asset to lay claim to in case you default on repayment. You can also get attractive rates on a second mortgage.

That having been said, your credit score does play a role in determining how easily you can get a second mortgage in Toronto and how strict the mortgage terms are. It tells the lender whether you are a high-risk or low-risk borrower. Any lender in Toronto will be willing to offer low rates to a low-risk borrower and will hesitate to do so if the borrower has a poor credit score. If you are looking to get a second mortgage, here are some ideas on how to improve your credit score in advance so that you get the best possible rates.

Avoid too many requests

Repeated requests for your credit score by many different lenders may actually cause your score to drop. Your credit can be affected when you ask a potential creditor to make inquiries about your credit as this implies that you are planning to get a new line of credit. Avoid making applications for loans that you may never avail of. Even if you don’t need to pay interest on a loan until you sign up for it, too many loan applications may still prove costly by damaging your score and hiking the interest rate you qualify for in the future.

Avoid taking new credit cards to boost available credit

Your credit score calculation takes into account the ratio of debt to available credit. To boost the available credit and consequently improve the debt to credit ratio, many people opt to take new credit cards or lines of credit. There may be some marginal benefits of this new credit, but the costs associated with such credit will negate any benefits. Another pitfall is that you may actually start using the credit and consequently increase your debt.

Fix errors immediately

Homeowners in Toronto should verify the accuracy of their credit scores well in advance before applying for second mortgages. If you find any anomalies or errors ask the rating agency to fix them immediately. This will allow you to present accurate information about your credit worthiness when you apply for the mortgage.

Rectify missed payments quickly

If you have missed a payment on any debt, make sure you make payment as soon as you spot the lapse. Generally, once an account is due for more than 60 days it will start appearing on your credit report. Tracking payments due regularly and fixing missed payments within this time window is the easiest way to make sure your credit score remains high.

Maintaining a good credit helps you negotiate better terms and get attractive offers from lenders when you shop for second mortgages. When you have a good credit score, you can also avoid paying higher interest on other loans and have better control over your finances.