A second mortgage is a mortgage created while the primary
mortgage is still in effect.
Second mortgages often come with higher interest rates than
first mortgages, however, they are still more affordable than credit cards.
Typically the amount borrowed with a second mortgage will be less than the
first mortgage.
The different types of second mortgages are home equity
loans or home equity lines of credit. Home equity loans are usually one-time
transactions with the lender. The amount you can borrow depends on your income,
credit situation, your home's equity and how much debt your home currently
secures. You receive the money as a one-time payment and can't take out more
funds without getting another loan. They have a fixed interest rate, meaning
borrowers will not have fluctuating interest rates over the loan term.
On the other hand, Home equity lines of credit, also known
as HELOCs, are revolving credit lines that you can borrow on an as-needed
basis, up to your approved credit limit. They are similar to credit cards but
are secured with your home equity, and thus have much lower interest rates.
With a HELOC, you can borrow money, repay it and use the credit line to borrow
again. Just like credit cards, the interest rates on HELOCs vary.
In addition to funding home renovations and other
investments, second mortgages are used by many to pay off debt. In March 2022,
household debt in Canada made up 105.1% of the country's nominal GDP. In
addition, according to data from the Computer and Enterprise Investigations
Conference (CEIC), the total household debt in Canada in April 2022 was
$2,116.3 billion.
If you have debt you want to eliminate quickly, getting a
second mortgage is a viable option that allows you to access the funds needed
in a short period of time.
How can you find a reputable second mortgage lender?
To find a reputable second mortgage lender, you should first
contact your first mortgage lender, get a quote, and compare their offers with
those of other lenders. The best deal will likely come from another lender.
On this note, the lender offering the best rate may not be the most suitable for you because the hidden costs may outweigh the benefits of a lower-interest loan. Also, use a reliable mortgage broker to help you choose a suitable lender for the loan.
How to Get a Second Mortgage
1. Research different banks and lenders: Check out different
banks and lenders that offer second mortgages. You can also speak to a mortgage
adviser and check online to see the available deals to compare costs with other
lending forms to ensure a second mortgage is right for you.
2. Determine your eligibility: You can determine your
eligibility by knowing much equity you have in your home. Equity is the
difference between the house's worth and any debts attached to the property.
That means your equity is $400,000 if you still owe $600,000 on a home worth
$1,000,000. Lenders will use this number to calculate how much money they can
loan you with a second mortgage. Generally, they will require you to have over
20% equity in order to be eligible for a second mortgage.
3. Discuss your financial situation with a loan officer: You
must discuss your financial situation as soon as it is practical, just like any
other financial choice. Your loan officer will guide you through getting a
second mortgage. You can also look at loan estimates to get the most affordable
rates.
4. Review the loan terms and conditions: You must read loan
disclosures carefully. You must be sure to find a loan that does not include
penalties if you are late with a payment. For some loans, one late payment
could result in fees, dramatic increases in the loan's interest rate and the
required monthly payment.
5. Apply for the loan: After discussing your financial
situation with a loan officer and reviewing the loan terms and conditions, you
can apply for the loan.
6. Meet with the loan officer again to review the loan: You
must return to your loan officer after applying for the loan.
7. Sign the loan agreement: As long as your loan officer has
reviewed the loan, you can go ahead to sign the loan agreement.
8. Make payment arrangements: You can start your payment
arrangements after you have signed the loan agreement.
Enjoy your new second mortgage.
How to Get Rid of Debt with a Second Mortgage
1. Decide if a second mortgage is
the best option: You can take this decision by checking your credit score. If
you have a good credit score over 650 and if you have enough equity to cover
your debts, you can get a second mortgage to consolidate your debts and pay
them off faster.
2. Calculate your monthly payments and compare them to your
current monthly debt payments: You should check your monthly cash flow and
compare it to your estimated monthly payments for a second mortgage.
3. Compare interest rates and terms of the second mortgage
to those of other loans: Look for a loan right for you by checking out online
lenders, credit unions and banks. Also, look for lenders offering direct
payment to creditors, simplifying the consolidation process. Then compare the
interest rates and terms of the second mortgage to those of other loans.
4. Select a lender and complete the loan application: After
you find a lender, you can apply for the loan. Most loan applications require
you to provide additional documents like past tax returns, bank statements or a
copy of your driver's license.
5. Receive pre-approval and begin the loan process: Your
lender must check your employment history, debt-to-income (DTI) ratio,
loan-to-value (LTV) ratio, credit history, and income. When approved for the
loan, you should make your payments immediately.
6. Make the second mortgage payments and track your debt
consolidation progress.
Celebrate when your debt is reduced by 50% or more: Because you are on your way to being debt-free.
What are the benefits of getting a second mortgage?
1. A great way to improve your credit score: This type of
mortgage has lower interest rates than other types of debt. You can pay
periodically, therefore, improving your credit score.
2. Provide you with more financial stability: This mortgage
will give you access to funds at some of the lowest interest traits in the
lending industry.
3. Help you cover unexpected expenses: A second mortgage
could help you pay for those big expenses you didn't plan for, like medical
bills or home repairs.
4. Help you stabilize your finances in the event of a job
loss: If you are without a job, a second job can keep you afloat until you can
find a new job. This way, you can pay necessary bills such as electricity and
gas.
5. Provide you with extra funds to purchase a home or to invest: Second mortgages allow you to borrow a significant amount, which is about 80% of your home's value. With a second mortgage, you can purchase a second home, invest it, or do anything else you want with it like paying off debts.
What are the risks of getting a second mortgage?
1. You will be at risk of losing your home if you can't make your payments: In the event of default, the original mortgage would receive all proceeds from the property's liquidation until it is all paid off. The remaining proceeds will then be used to pay off the second mortgage. If your home has dropped in value, you could be left having to pay the difference. Taking a second mortgage is risky, and you must analyze the situation carefully.
2. You may not be able to get a second mortgage if you have
a low credit score. If you can't get a second mortgage, you may have to settle
for a smaller loan or a loan that has a higher interest rate: It isn't as hard
as one might think to get your request approved for this type of mortgage, but
if you cannot manage it, this will impact your credit score. That's why you
must plan before requesting a second mortgage, or else you will have to settle
for loans with higher interest rates.
Regardless, this should not discourage you from taking a
second mortgage because mortgage financing is some of the cheapest available.
With a second mortgage, you get the chance to be financially stable, improve
your credit score and invest in a new home or business.
Jessica Coates is a blogger in Toronto. She graduated with
honors from the University of British Columbia with a dual degree in Business
Administration and Creative Writing. Jessica Coates is a community manager for
small businesses across Canada. When not working, she leisurely studies
economics, history, law and business solutions.
