Let’s get to the point.  Refinancing to pay off debts certainly has its advantages and no doubt for many it can stop a financial disaster.  Everyone has heard of refinancing or re mortgaging the existing mortgage for a larger one, and using the proceeds to pay of debt that has gotten out of hand. 

But, what about using a 2nd mortgage?  Will  this accomplish the same goal?

In today’s market, it’s common for many borrowers to call inquiring about refinancing and to pay off debt.  Not surprisingly, many have already done some sort of refinancing with their first, and some, have even taken out a new 2nd.  Unfortunately they did not learn their lesson.  There is only so much water in the well, keep taking it out, and sooner or later, it will become dry.

A 2nd mortgage is ideal for situations where one needs say,  $10,000 to 50,000 to help them through a tough financial time.  Better, if they have monies coming in, and plan to discharge the 2nd in short order.  Unfortunately that is mostly not the case. 

When a 2nd mortgage is placed behind a 1st, it used to be ( in better economic times), it could have been arranged up to 80 or 90, or even 95% of the appraised value.  Those that used it as a carry for ever mortgage, it has trapped them into maximizing the home equity.  In other words, there is no more equity in the home left, if the needs arises that more funds are needed.

So why was the 2nd put on the first place?  It depends.  It might have been that  the penalty to refinance the 1st might have been less cost effective.  It might have been the broker, specialized in 2nd mortgages, and saw it a quick way to make a buck, or ill advised the borrower.

Fact is, I rarely advise my clients to put a 2nd mortgage for the very reason.  I like leaving them with an open door and room in their equity, should it be required later.  Most importantly though, I explain to my clients that if a 2nd mortgage is needed, they should plan to pay it out as quickly as possible.   A $25,000 2nd mortgage even at 10%, if amortized over a 25 year period, will end up costing $ 42,000!   The fact the mortgage payment is only a few hundread dollars, may cause many people to simply pay it, and not pay attention to the cost.   On the other hand, if one treats it like, for example an auto loan, you be best to pay it out as quickly as possible.

If you are a borrower and looking to refinance your mortgage, you would be best suited to consider all your options.  If your mortgage broker tells you he has a quick fund 2nd mortgage available, and does not discuss with your the pros and cons, chances are, there are no pros in your favor.

Working with a mortgage broker, can be, one of your best choices, just make sure yours is qualified and has your interest before anyone else.

If you are a borrower with a 2nd mortgage, and need to refinance again, chances are, you are at maximum equity right now.  Most lenders have cut back their lending values in the past year.  2nd mortgage lenders are now more conservative.  Even in major urban centers, they will only lend to a maximum of 75%LTV.  65% in rural areas.   Refinancing with a new 1st, may also have drawbacks.  Today with interest rates they way they are, many lenders are charging the rate differential.  Not unusual to hear of penalties as much as $20,000!.   We all hope better times ahead.

It’ your money, dont part with it without first considering all the issues.

You may contact me anytime for a free consultation by visiting my site:

www.canadianmortgagefinder.com and www.refinance-canada.com

There is no question that refinancing a home today is still possible despite the many changes to lending guidelines.  Having said that however, the changes have affected those borrowers within the range of credit scores between 560 to 649.

It used to be a lender would allow refinancing up to 95% of the value of the home ( LTV), even with some explainable bruised credit.  Today, most lenders have changed their guidelines and will only consider borrowers with a minimum score of 600.  At 600, it is still not certain it will qualify.  Some lenders may only look at a mininum score of 650.  The insurers have also changed their guidelines.  Depending on the credit scores, they may cut back the refinancing amount from 95% to between 85%-90%.   These changes may make some refinancing situations not work for the borrower, who may be seeking to consolidate a 1st and 2nd mortgage, and other consumer debt.  The lower lending values may not provide enought funds to pay out all the creditors.

Borrwers whose credit scores are 650 and above may still qualify to the upper 95% LTV level, provided they are not self employed ( in which case, it may be cut back to 90%LTV).

Certainly these changes will have a great impact on the real estate market sooner or later.  Borrowers who are finding themselves squeezed by mortgage payments and other retail consumer debts, may end up further deteriorating their credit, to the point they may never requalify.  It is important for these people to contact  their creditors and explain their situations, perhaps making other repayment arrangements.

Our econonmy will improve eventually.  We all know markets are cyclical but sooner or later we will begin to see some positive changes.  Slowly the guidelines will be stretched allowing more people to qualify. 

It is ironic that thos who may not qualify today because of tighter guidelines, find themselves not qualifying because the same guidelines that allowed them to borrow before, have now be shut down.

Imagine the financial hardship that might prevail if it were that once you lock into a mortgage for a predetermined term, say 5 years, you would be prevented from breaking that mortgage until maturity.  We are lucky that mortgages in Canada do allow for early discharge, albeit, with a penalty, allowing homeowners to get a new start on a new mortgage, with new terms, new rate, and new mortgage amount.

 To refinance your existing mortgage means simply just that.  Discharge your current amount and replace it with a new mortgage.  Why?   Simple;  to lower your borrowing rate,  and or, pay out other debts and consolidate those debts into the new, larger mortgage, resulting in a savings of monthly cash flow, since the mortgage rate is lower than any of the debts being paid off on consumer loans and credit cards.

 The refinance process is similar to obtaining a mortgage to purchase a new home.  The borrower must meet the Bank’s lending criteria based on credit, affordability, and loan to value.  Loan to value, or LTV is the amount you can borrow expressed as a percentage of the appraised value of your home.  There are guidelines established by both the lenders and the insurer in cases where the mortgage needed is high ratio.  Some lenders may offer cash back mortgages at posted rates from 1 to 7% of the mortgage amount and may be an option for borrowers seeking to borrow a bit more than what is allowed.

 Typically, borrowers may refinance up to 95% LTV, but can be offset in situation where

The borrower may be self-employed, or based on the credit grade.  Refinance funds may be used for any purpose, except debt management.  This means, if you are behind your current debts you cannot turn to refinance as an option under any of the insured programs.

 Once the refinance mortgage is approved, and all your documentation has been accepted, you will require to retain the services of a lawyer who will effectively remove the previous charge and place a new charge in favor of the new lender.  Your solicitor will also ensure the discharge balances required to pay off your existing mortgage(s) and other personal loans and credit cards.  He will be responsible to disburse the required funds to all the creditors.  In some cases, certain lenders may use a Canada wide closing service option at reduced prices and provide you with the convenience of coming right to your home to sign all the mortgage papers.  When dealing with your mortgage broker be sure to ask all the available options.

 Mortgage refinancing will be much tougher when the borrower’s credit is impaired or has had major derogatory and poor repayment history.  Until recently mainstream lenders offered several products aimed at borrowers with “ bruised credit” through programs like the Genworth Credit Assist program.  These programs were aimed at borrowers with lower credit scores negatively impacted by marital break up, job loss or illnesses.  These programs have now been sidelined with the recent economic situation making it difficult for borrowers with credit scores between 550 to 590.  If you require refinancing upto75 or 80% LTV, your chances are better even in today’s environment.  Gone are also the high ratio self-insured products offered by many of the non mainstream lenders. 

 Today, if your credit score is less  than 600, and even at that, it may pose a challenge, you may need to postpone your refinancing option if you require more than 80% LTV.  It is important that if you fall in this category to keep on maintaining your credit rating so that you may qualify when the guidelines are broadened once again.  If you fail to do so, and your credit rating deteriorates, it will affect your from any refinancing approval in the future.

 Refinance is still a very viable alternative for good credit borrowers to restructure their current finances and regain control of their debts.  Transfering high interest debt to a lower rate facility such as a mortgage helps to free up household cash flow.

 Aldo Mormile is a registered mortgage consultant with VericoLendingDirect Corp;.  He has been in the lending industry for 20 years and obtained his mortgage certification in 1993.