Second Mortgages
Second Mortgages
Why Take Up A Second Mortgage?
A second mortgage is the most popular method to access your home equity. The loan is second in line for repayment in the event of default, hence the phrase “second mortgage.” This means that if the property is sold to settle the debt, the first mortgage will be paid off before the second mortgage in the event of a borrower failure.
You can choose between a home equity loan and a home equity line of credit when deciding to access your home equity through a second mortgage. (HELOC).
Equity is an asset that your home accumulates as you pay down your mortgage. The amount of equity in your home is calculated by tallying up the estimated real estate value of your property and subtracting the balance remaining on your existing mortgage. Once you have at least 20% equity, you’ll be able to access a variety of credit products that are secured against it.
How much money can you get a second mortgage for?
| Home Value | $650,000 |
| Maximum Borrowing Amount | 80% of home value |
| Mortgage Left | $300,000 |
| Amount You Can Borrow | $220,000 |
Home Equity Loan
Mortgage Loan
A lump sum of money from a home equity credit will be deposited into your bank account. Naturally, your house equity serves as security for the loan, which must be paid back in installments over a period of time usually ranging from five to fifteen years. The entire loan sum will be subject to interest charges.
Benefits of Home Equity Loans
Regular Payments – You’ll have equally divided payments with a home equity credit, making budgeting and calculation simpler.
Fixed Rates – Many lenders charge fixed interest rates, which are occasionally less expensive than variable rates and won’t alter over the course of your loan.
Drawbacks of Home Equity Loans
Higher Interest Rate – A home equity credit will have a higher interest rate than your first mortgage.
Collateral – If you default on a home equity loan by making too many payments late, your property may be at risk.
Home Equity Line Of Credit (HELOC)
In that you can take money out of a rolling credit limit, a home equity line of credit (HELOC) works more like a credit card. You have the option of paying the minimum amount due each month or paying off your debt to get back to your full credit limit. In most cases, you can borrow up to 85% of the worth of your home. Interest rates on HELOCs are typically variable and change according to an indicator. Your monthly payments will change as a result, becoming less stable than those for a home equity credit.
Benefits of HELOCs
- With a HELOC, interest is only charged on the sum you borrow. It is not charged on what you use. Unlike a home equity loan, you only pay interest on the portion of your credit line that you actually use.
- Quick Funds Access – A HELOC is a source of money you can access at any time, as opposed to asking for a loan when a need arises.
- Flexible payment terms – You can choose to make a number of, partial, or minimum monthly payments with a HELOC until the draw time is over. (around 10 years). You are only required to begin making regular payments toward the principal and interest once the draw time has passed.
Cons of a HELOC
- Higher interest rates – If you regularly make partial payments, you risk paying higher interest rates overall.
- If the prime rate in Canada increases during your tenure, variable interest rates, which are sometimes higher than fixed rates, will be in effect.
- Fees: To maintain the HELOC open, many lenders charge a yearly fee.
- Collateral – Since your house serves as collateral for your HELOC, you risk losing it if you don’t make your payments on time.
What Can a Second Mortgage Be Used For?
Although the concept of house equity may seem confusing at first, it can be a very valuable asset when you consider all the ways you can benefit from it. In fact, the majority of Canadian homebuyers use some of their equity at some time to:
- Debt consolidation,
- Home improvement
- Financing an automobile
- Launch a business and
- Finance higher education
- Make Serious Investments
The Benefits And Drawbacks Of Taking Out A Loan Against Your Home
Utilizing the equity in your house can be beneficial in a variety of situations, but you should be aware of both the advantages and disadvantages as they may affect your way of life.
Advantages
- Large Loans – Without having to sell your home, you can access a sizeable sum of money over a long period of time if you have enough equity.
- An alternative to refinancing: Is to obtain a second mortgage in place of refinancing your house to pay for a purchase or renovation. This can help you save on expenses such as closing fees.
- Good Interest – Applying with a lot of equity and healthy finances can win you higher interest rates than with unsecured credit products.
Disadvantages
- Extra Payment – A second mortgage is a new debt, not a refinance, so you’ll have to make an additional payment on top of your mortgage. If handled carelessly, this could be difficult on your savings and even result in debt, damaged credit, and even house foreclosure.
- Fees – Other expenses related to lending include those for loan origination, appraisals, bookkeeping, and legal services.
- Difficult To Qualify – If you have poor credit, a low family income, or are a first-time homeowner, it may be difficult for you to qualify for favorable home equity products.
- Lower Equity – Your home will have less equity as you take on more mortgage debt.