Last week I arranged a private second mortgage for a family living in North York.
The interest rate was 9.49% and the loan amount was $40,000. Mrs. Jones called me to ask how come the monthly payment will only be $316.34.
This is an excellent question. I am always upfront with the costs and interest rates for a potential private mortgage client, as there is no denying there can be a bit of “sticker shock” at first.
Then when they hear how much the monthly payment will be, they are very pleasantly surprised, as they were expecting much higher.
Fact is, the vast majority of second mortgage borrowers are looking to keep their monthly payment as low as possible – usually they are escaping a scenario of too much cash outflow each month.
So in fact it is typically done to help the borrower.
But some people feel they can manage a higher payment and THEY WANT to knock some principal off each month.
Of course, that should be no problem for most private lenders. We only have to ask.
First thing I ask my clients in such instances is to tell me how much per month they are comfortable paying towards this mortgage. I will then calculate what amortization period that works out to – and request it.
In the case of our $40,000 private mortgage at 9.49%, here are a few options:
Interest only – $316.34 per month
25 year am – $349.20 per month
20 year am – $372.59 per month
15 year am – $417.45 per month
These same clients were also interest in the possibility of making lump sum payments now and then, just as they can with their first mortgage. They figured they will have some extra cash occasionally from tax refunds and employment bonuses.
This one is harder to accommodate, unless the mortgage is fully open, like a Home Equity Line of Credit is, for example.
Most private lenders will suggest you accumulate as much as you can over the term of the mortgage (typically only one year) and then reduce the mortgage amount at renewal time.
Keep in mind we never plan our clients to stay in a private second mortgage for long. As soon as it is financially viable, we will pay off this mortgage – usually by combining the private second mortgage with their first mortgage when it renews. This avoids prepayment penalties on the first mortgage.
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