You may have heard about junior liens, but what the heck are they? In short they’re the same thing as a second mortgage or a home equity loan – you’re just using the equity you already have in your home to get the money you need to move forward. They’re not the same as a home equity line of credit though (something that should be avoided unless you really need one!), and it’s important to understand the differences. Here we’re going to talk about junior liens, what you can do with them and why you would want one.
What is a Junior Lien?
Second mortgages allow you to use the equity in your home as collateral when you still have another mortgage (your first mortgage) on your home. You can have open ended mortgages, like HELOCs or home equity lines of credit that you borrow and repay again and again, or you can have close ended mortgages that give you a lump sum at the start of the mortgage the one time.
The thing you’ll need to understand about second mortgages is that they cost more – because in the grand scheme of things, your first mortgage will be the most important. You’ll want to talk with one of our Toronto mortgage brokers more about how another mortgage will affect your equity situation in your home.
Your First Mortgage Gets Paid First
You’re going to pay a higher interest rate on a second mortgage because the lender assumes a higher level of risk. Let’s say you default on your mortgage and the lenders are lining up. If your home gets put up on the auction block, your first mortgage lender takes their cut first. If you have to sell your home, the debt with your first mortgage lender gets settled first; unless you can get the first lender to sublimate the loan to the second (switch who gets to be on top), that’s how it will always be. It’s very rare for a lender to sublimate their loan obligation.
Be Careful Consolidating Your Debts
While consolidating high interest debts with the equity in your home can seem like a good idea, it may not be. You’re going to want to lock in a super low interest rate on your home equity loan before you even think about paying off your debts this way.
Working with us as your Canada mortgage broker we’ll help you understand if this is the right move for you – because after all, you’re not really paying off a debt, you’re just shifting it. You interest rates might stay low in the short run, but in the long run you could run into some serious trouble. If you’re not able to repay your home equity loan, you could end up in the position of losing your home. No one wants that, especially us. Give us a call today and see how we can help you find the right solution for your borrowing needs.