Break or Take a Second Mortgage?

Break or Take a Second Mortgage?

While there is no ‘one-size-fits-all’ playbook, we can tell you that behind every good mortgage decision is an assessment of overall cost. 

Say that you’ve been quoted $30,000 by a contractor to renovate your basement in order to bring in rental income. Let’s also say that you are only 2 years into a 5 year fixed-rate mortgage. The balance of your mortgage is $650,000 and carries with it a rate of 3.29%. 

You have learnt that the penalty to break your mortgage is approximately $15,000. This means that you would need to pay a penalty that equates to 50% of the amount you wish the borrower. This is also before the possibility that there will be mortgage arrangement fees for your new mortgage. This also assumes that at the time you break your existing mortgage you are able to qualify for a mortgage rate no lower than your existing rate. 

You spoke with a flexible funding source like DV Capital Corporation and learnt that you qualified for a home equity loan.  After you completed your quick mortgage review you were approved for a second mortgage rate of 7.99%, and estimate closing costs of approximately $2,500. Annual interest on the loan will equate to only $2,397. When we factor in the closing costs you instantly notice the difference in cost, to borrow the same money. In fact, your second mortgage option will save you roughly $10,000. 

To consider

• Your existing first mortgage still has a few years until maturity.
• Your second mortgage lender may grant additional extensions or renewals, at a cost.
• Your second mortgage lender may not offer a renewal and you would therefore need to refinance your second mortgage. 

To compare

• The cost of breaking both your first and second mortgage, without delay, in order to consolidate both existing mortgages into a new first mortgage.
• The cost of renewing or replacing your second mortgage in order to reach the maturity date of your existing first mortgage – where you’d consolidate both mortgages into one. 

Often times the need or desire to borrower money arises. As demonstrated in this brief article, the best option is the option that saves you money and makes most sense. 

If you have any questions or would like a quick mortgage game-plan discussion, contact us at any time.