Canadians are in debt to the tune of 1.48 dollars for every dollar they earn.  This would not necessarily be alarming if it was simply mortgage debt.  But lines of credit or worst yet revolving debt such as credit cards that run much higher interest rates will eventually cause many people to go bankrupt.

The attitude of have it now and pay for it later has been adopted by many Canadians as well as Americans and this is one major cause of the debt problems faced by the majority of the working class today.  You’ve probably heard advertisements such as a furniture company that offers no payments until 2015 which is completely ridiculous for someone to do, yet many will.  Just think about this for a moment. Yikes the furniture would be worn out by then especially if you have children.  So if you did this deal you’d be in debt come 2015 with virtually nothing to show for it.

So what is good debt if there is such a thing?  It is debt that you utilize to buy something that appreciates in value for the most part.  A home mortgage is an example of good debt only if you as a consumer can afford the mortgage based on real income.  You should never buy a house that you borrow more than 75% of its value as well as never borrowing more than 3 times your yearly income for a mortgage.  If you can’t afford a home under those parameters then don’t buy one yet.  It’s as simple as that.  Saving up a down payment is the issue and you need to address that instead of locking into a mortgage way above your ability to pay.  There are ways to deal with saving for a down payment.  One way would be to work a second part time job and bank the whole thing.  Find ways to make extra money that you could save up.  Sometimes, if you’re lucky parents will help out with interest free loans that you can pay back later on when you can afford it better.  There are many other ways but all of them take time to implement, so be patient.  Buying a home at the right time is also a wise move.  Follow the real estate pricing and the economy.  In the last few years there are opportunities to buy homes for greatly reduced prices if you were one of the smart ones who still have a stable job and managed to save that crucial down payment.

So how do we as Canadians and Americans solve this problem of bad debt?   Perhaps focusing on good debt and educating consumers, teaching them what good debt is, verses bad debt would be a way of eventually turning this problem around.  Our parents frowned on going into debt for anything other than a house, and if they did have credit cards they paid them off quickly.  A credit card was used only as a last resort and they paid everything in cash only as they could afford it.  Living within your means and knowing the difference between a want and a need is wisdom in action.

A second mortgage as an option when there is sufficient equity in a home to help out with a financial need is sometimes a good way of handling a borrowing situation with a lower interest rate than using a credit card. 

In short start changing your attitude to borrow only when it is absolutely necessary.

What is second mortgage?

Second mortgage is the loan that you take keeping your home as collateral, which already has a primary mortgage on it. Second mortgages are junior to the first one. So, if your home gets foreclosed it will be paid out only after the primary loan is fully repaid. The second home loans generally has shorter maturity period as compared to the first one. You can borrow an amount based on your home equity.

How to refinance your second mortgage?

In order to refinance your second mortgage, you will have to find out if there are any penalties for paying it off early. You will also have to determine how much you would like the new loan to be for. Include the costs of remodeling your house. This should include any amounts needed to pay off your existing debts and. However, in order to get a refinance loan, your home needs to have good equity on it. Thus, before going to apply for refinance loan, you will have to find out how much equity you have on your home.

It is also important for you to collect and list all the information about your current house, including its current appraised value, balance on the loans, the number of years left, etc. All these information will be needed during the application. Shop for quotes so that you get a low interest refinance loan on your second mortgage. Negotiate for a better deal once you’ve narrowed it down to only a couple of offers. You will be able to get a better deal only if you have good credit.

Refinancing your loan helps you avail a lower interest rate, thereby lowering your monthly payments. Therefore, it helps you to save more or may be convert your adjustable rate mortgage to a fixed rate one or vice-versa. You can even combine both your home loans with the help of a refinance loan.

Before applying for your second equity mortgage, it is a very good idea to get a hold of a copy of your credit score. There are several websites that offer just this service. This way, you will have an opportunity to clear up any possible discrepancies between your records and the bank’s. If getting a second mortgage is part of your long term plan and not yet a pressing need, then you may have time to improve your credit standing. This can be done by simply meeting your financial obligations on time and in full. Pay more than the minimum amount on your credit card bills. By following these simple steps and practicing a little financial discipline, you could have a big payoff when it comes time to go to a mortgage centre.

 So what do you do if you are in the position described above?  Are you considering defaulting, or have defaulted already?

 There are five steps you need to do: evaluate, take action, recognize your lender’s situation strength or weakness, meet with your lender, and obtain a suitable option if there is any.

1. You need to decide what you can do about it.  Hopefully you haven’t defaulted yet or just given up.  You need to realize where your lender stands.  We’ll explain further about this shortly.
2. Now you need to find out what your lender is doing about your situation if you have begun the default.  You need to meet with your lender, but figure out number four below first.
3. Figuring out your options, this is so important.  What you need to recognize is where you stand in regards to how much incentive to foreclose your lender has over you?  This is incentive strength or weakness.

For example let’s take the scenario above.  Your home has a 175,000 dollars owing on it and you have a second mortgage of 50,000.  Your lender will have a higher degree of incentive to foreclose on you because your house can be sold and pay off a good portion of the amount owing.

Now let’s look at another scenario.  Let’s say your house is worth 150,000, and you have a first mortgage of 150,000 and a second one of 50,000 dollars.  Your lender will have very little incentive to foreclose in this situation because they will get nothing as they stand second in line for proceeds from the sale.  They will likely incur even more legal fees to foreclose. It’s a no win for them and they will be more open to suggestions from you in reducing payments at least for the short term.

Meet with your lender and call a spade a spade.  Tell them you’re underwater and state to them the present payments are crushing you.  Point blank ask what can be done to work this out?  In some cases the lender may stand firm and not want to help, in which case we have a government website for you to visit that you may get help from.  In many cases your lender will ask what level of payment you can handle for the time being, to get by and back on your feet, given the present economic environment.  It really does boil down to the amount of incentive your lender has in deciding what they will do.  If you have a lender with a higher incentive you will have to explain step one and have a plan to sell on how you will rectify the situation.  You need to make a sound case to them explaining that you need your payments dramatically reduced for the short term as you work out your plan.

If you’ve been making your payments up to this point you are a creditable borrower, the lender will look more favourably on you.

If you’ve missed some payments and your lender has incentive to foreclose you may have to exercise other options such as a short sale or a deal in lieu of foreclosure. 

The bottom line is make sure you know where you stand and meet with your lender before you default if possible so you know your options.  Don’t let money problems fester or they will do just that and it will be an all around worst situation.

If you can’t find resolution with your lender then go to the following website www.hopenow.com which is a website put up by the government of housing and urban development.  This website is for people in just that situation.

How you handled your first mortgage will naturally reflect on your ability to pay.  Banks will look at your payment history along with the actual amount of equity. Any change in the value of your property will also reflect on your interest rate. A higher value will count as increased equity, while lowered value will be looked upon as a risk. The better you handled your first mortgage, the better your negotiating position for the second one. Alternatively, you can opt instead to take out a home equity line of credit, which allows you to borrow only as much as you need as opposed to a single large sum. This could make your loan much easier to settle in the long run.

                Another possible factor that could affect your interest rate could be the purpose you are borrowing.  If you’re going to use the money in order to invest in some new business venture as opposed to something like a grand vacation, your bank may be able to factor that in as additional potential income and give you a slightly reduced rate.

It is best to shop around and possibly go to a mortgage broker who may find a better deal for you.

 A home equity loan is more like a line of credit or similar to a credit card, except there is no card.  Usually it is used for larger purchases than what a credit card would be used for.  It is an open loan that allows for a certain amount of available borrowing power based on equity you have in real estate or property you own.  Generally the lending institution will set that amount based on an appraisal of the subject property that is being used as collateral.  One major difference between these types of loan over a second mortgage is that the lender can freeze or limit the use of it if they feel your property has lost value due to market circumstances.  A typical example of this might be someone who had a property in Florida before the market collapse of 2008 who had such a loan.  Their property effectively decreased in worth by half in a short period of time.  The lender has more control over this type of loan.  Of course you have the option of finding another lender but remember there are always fees to set these types of financial contracts.

 No matter which type of borrowing scenario you choose make sure you read the fine print and shop around for the best interest rates.

1. What is a second mortgage?

  Answer:  Simply put a mortgage is a loan.  To have a secondary mortgage you must already have a first mortgage in place on a property.  You are borrowing a sum of money or portion above the value of the first mortgage presently existing on the property.

1. How do I know the amount of money a lender will lend me for a second mortgage?

 Answer:  You need to figure out how much your property is worth if you were to sell it.  Remember you will likely be bias in how much you think your property is worth.  For the purpose of find out the value a lender may want you to obtain an appraisal from a specified professional in the appraisal business.  If you’re lucky some institutions will accept a market evaluation from a real estate professional.  Market evaluations don’t usually cost anything where appraisals do.   Some lenders have a full time appraiser available at no cost or very reasonable cost.  Once you know the value of your property you simply subtract the amount owing on the first mortgage and this is your home equity or the amount of money you have tied up personally in your house.  There are other factors that play into the amount you can borrow.  The economy and financial crisis of the last few years have tightened up the market substantially.  Banks are riddled with mortgage defaults and may be reluctant to loosen up the money supply unless you have a stellar credit rating. 

1. How are interest rates calculated on second mortgages?

 Answer:  A number of factors play into the calculation including your credit score, the state of the economy, the lenders history and where they are at the moment with available money, and what you will be using the money for. 

1. Does the property I’m using as collateral need to have me living in it?

 Answer:  The short answer is no.  You will have to advise the lender which ever your status will be.  If you have no intention of living in the dwelling it will likely affect the mortgage interest rate.

 Second mortgages may also be tax deductible depending on what country you live in and what you use the money for.  If it’s for investment purposes such as RRSP’s or the purchase of stocks or even another property, then the interest on the mortgage may indeed be tax deductible.  If you use the money for investing in something then it would be wise to consult with a qualified accountant and crunch the numbers to find out for sure.

crunch the numbers with a pro

 Second mortgages are usually offered at a higher interest rate than a first mortgage.  If it’s at all possible it is better to increase your first mortgage rather than borrowing a second mortgage.  Unfortunately first mortgage lenders are sometimes reluctant to do this because of the interest they would lose over the term of the mortgage, if they had to redo the mortgage at the prevailing rates which could be lower.  Keep in mind there are fees in rewriting a mortgage.  If you can hold off borrowing until the term of your first mortgage expires then you could easily increase the first mortgage with out too much hassle.

Always be prudent and consult with a professional money manager before making a decision of this magnitude.

First mortgages take priority over 2nd mortgages when default occurs.   Generally interest rates reflect this disadvantage.  However there still are times when interest rates are favourable over a first mortgage to proceed with borrowing on a 2nd mortgage.  This particularly holds true if the terms on either loan is long enough that interest rates have changed to the down ward side.

Investigate the possibilities with this type of financial tool by calling and meeting with a  mortgage specialist.  You may be pleasantly surprised at the options available.  You may learn some mortgage refinancing tips and save some refinancing fees.