Why Are Second Mortgages More Expensive Than First Mortgages?
Thinking about tapping into your home equity with a second mortgage? While it can be a helpful tool, be prepared for a higher interest rate compared to your first mortgage. Here's why:
Risk vs. Reward for Lenders:
First mortgages are the primary lien on your property. This means if you default, the lender gets paid first from the sale of your home. This lower risk translates to lower interest rates for borrowers (around 4.6% as of February 2024, according to rates.ca: https://rates.ca/).
Second mortgages are subordinate liens. They only get paid after the first mortgage is paid off in full. This higher risk for lenders translates to higher interest rates, often 2-4% higher than your first mortgage.
Example:
Imagine you have a $500,000 home with a remaining first mortgage balance of $300,000. You decide to take out a second mortgage for $100,000. In this scenario:
Your first mortgage might have a 4% interest rate.
Your second mortgage could have an interest rate of 6-8%.
The additional cost adds up quickly. This is why it's crucial to thoroughly research and compare rates before committing to a second mortgage.
Alternatives to Consider:
Home equity line of credit (HELOC): Similar to a second mortgage, but offers more flexibility with a revolving line of credit.
Cash-out refinance: Replace your existing mortgage with a new, larger one to access cash.
Remember:Using your home equity comes with inherent risks. Ensure you can comfortably afford the additional monthly payments before proceeding.