If you have trouble paying your 1st mortgage and have some equity in your home you may be tempted to take a secondmortgage to fix the problem. Will Roger once said “When you find yourself in a hole, stop digging”. Before taking a second or third mortgage, please ask yourself if you are doing just that.
Here is a list of questions you should ask before you are taking a new mortgage on:-
What is the term of the loan – Often with private lenders the term is only a year or two. If you need a short term fix, a short term loan might be good. But, if after one year the lender will not let you renew and you will not have the money to pay back they are likely to initiate foreclosure proceeding.
What are the upfront costs – These can mount to few thousands of dollars, especially if you are already in financial stress and your credit score is not that great.
What are the payout penalties – Payout penalties can be extremely high. The highest I have seen was 6 month interest.
The most important question to be asked is “Can I afford the monthly payments?”
I was talking to a home owner in the Vancouver area who has 3 mortgages on his property. He has spent thousands of dollars in upfront fees and now he cannot afford the payments so he wants to sell the property. Once the property is sold, he will have to pay penalties on all three mortgages, which will cost him an additional $8,000. Had he asked himself the questions listed above ahead of time he would have probably concluded that selling was his only way out of the hole and would have saved himself more than $10,000 in fees.