Using a Second Mortgage to Get Out of Debt
For some homeowners, the idea of taking out a second mortgage sounds scary – after all, how can they manage two mortgage payments. But when you take out a second mortgage in order to pay off debt, the result is often that you end up saving money because you are lowering the total interest rate that you pay on that debt.
In this article, we will discuss some of the most commonly asked questions that homeowners have concerning second mortgages and how they can be used to pay off debt. Hopefully this will help to put your mind at ease and help you in your decision as to whether taking out a second mortgage to pay off debt is right for you.
What is a second mortgage?
Let’s start by understanding exactly what a second mortgage is. A second mortgage is a secured loan that you take out by using the equity in your home as collateral. Your home equity is the value of your home minus what you still owe on it.
So for example, if your home is worth $500,000 and you have $200,000 still owing on your mortgage, then your home equity is $300,000. Since most lenders allow homeowners to borrow to 80% of their home equity, that means that in the case above, you would be able to borrow up to $240,000.
Once you have taken out a second mortgage, you would make monthly or bi-weekly payments on it just like you are already making on your first mortgage until it is paid off. The interest rates on second mortgages are a little higher than interest rates on first mortgages, but they are still much lower than the rates on unsecured loans such as credit cards or personal lines of credit. And this is what makes them such a good option for paying off other types of debt.
Is refinancing the same thing as getting a second mortgage?
No. Refinancing is when you break your first mortgage in order to get a brand-new mortgage. Refinancing can also be used to pay off debt (by taking equity from your home), but you need to keep in mind that when you break your mortgage, there will be a financial penalty. In some cases, it may be worth it for you to refinance – particularly if you are close to your renewal date – since you may be able to get a better interest rate than with a second mortgage.
In other cases, the financial penalty will be too high on a refinance, and a second mortgage will be more advantageous even though the interest rate is a little higher. Your Matrix Mortgage Global agent will run the calculations for you in order to see which option is best for you.
Is a home equity line of credit the same thing as a second mortgage?
A second mortgage is sometimes also referred to as a home equity loan. This can be a little confusing because a home equity loan (second mortgage) is NOT the same thing as a home equity line of credit or HELOC.
A home equity line of credit also allows you to borrow against the equity in your home however it is a revolving line of credit rather than a one-time loan. A home equity line of credit works like credit card in that once you borrow money and pay it back, you can borrow it again. Once you pay back a second mortgage, you would have to re-apply if you wanted another one.
While home equity lines of credit can be extremely useful tools, they are not generally recommended for paying off debt but rather they tend to be used more often for emergency expenses or larger expenses that the homeowner would otherwise have to put on a credit card or dig into savings for.
How soon can I take out a second mortgage?
In order to take out a second mortgage, you will need to have sufficient equity built up in your home. The amount of equity that you will need depends on the lender. With a traditional lender such as one of the big banks, or a credit union you will need to have built up at least 25% equity in your home. With a trust company on the other hand, you may only require 10-15%.
And finally, if you go to a private lender to get your second mortgage, your options may be even more flexible since private lenders are not bound to the same rules as more traditional lenders.
At Matrix Mortgage Global we work with a wide assortment of lenders – traditional, alternative, and private – and we will work to match you with the lender most appropriate for your situation.
How long does it take to get approved for a second mortgage?
The answer to this question depends on what kind of lender you decide to go with. If you are getting your second mortgage from a traditional lender such as a bank or credit union, it could take several days for your approval to go through.
If you work with a mortgage broker such as Matrix Mortgage Global and you apply for a second mortgage with an alternative or private lender, then your approval could come back in 24 hours or less.
What is the interest rate on a second mortgage?
Because lenders consider second mortgages to be riskier than first mortgages, the interest rates on second mortgages do tend to be a little higher. That being said, the interest rates on second mortgages are still much lower than unsecured loans such as credit cards, car loans, etc.
The interest rate will also vary depending on the lender. Traditional lenders are usually able to offer the best rates, however because their rules are stricter, not everyone can qualify. Alternative a private lenders tend to charge a little more – but again, if you are borrowing to pay off other high interest debt, your savings can be substantial.
Can you get a second mortgage if you have bad credit?
Lenders consider second mortgages to be riskier than first mortgages, so if you don’t have good credit it can be difficult to qualify.
In Canada, we measure credit with a score between 300 and 900, with a higher score being better.In order to get a second mortgage from a traditional lender such as a bank or credit union, you will likely need to have a credit score of 650 or higher.
To get a second mortgage with a trust company, you will likely need to have a credit score of at least 550.
Private lenders on the other hand have a little more leeway in who they can lend to and they can look at other factors besides credit score in order to determine eligibility. In fact, there are even some private lenders that specialize in bad credit loans.
If you do decide to work with a private lender, it is of the utmost importance that you work with someone who is reputable. At Matrix Mortgage Global, we have good relationships with many private lenders and can help to match you to one that is suited to you.
Is it a good idea to use a second mortgage to pay off debt?
A second mortgage can be a great way to pay off higher interest debt because it can allow you to save money by lowering your overall interest payments, help you reduce the total monthly amount of your debt payments – and in some cases, it can even do both.
It is important however that you remain disciplined with your spending so that you do not go back into debt. Otherwise, what will you do? Take out another mortgage? This could leave you off worse than before.
But if you do have the discipline to refrain from taking on more debt while you are paying off your second mortgage, it can be a wonderful way not only to get out of debt, but to rebuild your credit rating in the process.
What can a second mortgage be used for?
As mentioned, a second mortgage can be a great tool for paying off debt, but it can also be used for other things such as paying for home renovations, a down payment on a second home, start-up capital for a new business venture, purchasing a vehicle, or really any other large expense.
You’ve been working hard making your mortgage payments and building up equity in your home. You may as well use that equity when you need to!
How can Matrix Mortgage Global help you?
A second mortgage can be a great tool for paying off debt or for accessing cash in your home equity to pay for any number of expenses. Unfortunately, many homeowners are not able to get a second mortgage with their bank because they don’t have enough equity built up or their credit score simply isn’t high enough.
At Matrix Mortgage Global, we work with dozens of lenders including specialty lenders which means your chances of getting approved for a second mortgage are greatly increased when you work with us. Contact us today to get started and take the first step in getting a second mortgage in order to get out of debt.