what is a second mortgage how does it work

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What is Second Mortgage and How Does it works?

If you would like to borrow from your home equity at a rate of interest that is better than what you would get from an unsecured loan, then a second mortgage can be a great option. Still, however, there are other options you might want to consider as well such as mortgage refinancing. To determine which option is the best choice for you, it is recommended that you sit down with a professional mortgage broker to run some calculations.

What is a second mortgage?

A second mortgage is a secured loan that uses the equity in your home as collateral. It is called a second mortgage because you are not required to break your first mortgage in order to get this loan. Most lenders who offer second mortgages will allow you to borrow up to 80% of your home’s equity, although there are certain lenders who will allow you to borrow even more than this.

To determine how much equity you have in your home, simply subtract what you owe on your first mortgage from your home’s current value. If you are looking to borrow a large sum with your second mortgage, it may be in your best interest to spend a few hundred dollars and get your home appraised.

What are the rates for a second mortgage?

Rates for second mortgages can vary across the country but if you live in a larger city such as Toronto, you can likely get a better rate than you would in a more rural area. Since second mortgages are considered riskier than first mortgages, you can expect the rate to be higher than that of a first mortgage. Nevertheless, since these are secure loans the rate on a second mortgage will usually still be much lower than that of an unsecured loan such as a credit care or even a personal line of credit.

In addition to the interest rate itself, many lenders also charge fees up front which can run an average of 3% for a closed term mortgage or 4% for an open term mortgage.
Other expenses that you might have to pay if you get a second mortgage include notary fees, legal fees, appraisal fees and insurance.

What are the types of second mortgage?

When it comes to second mortgages, there are two main types to consider: home equity loans and home equity lines of credit (HELOCs). Although they are similar in name, these two types of loans have some different characteristics.

With a home equity loan, you borrow a lump sum of money from your home equity and pay it back at a certain interest rate. After you have paid back your loan, if you wish to get another home equity loan, you must go through the application process again.
A home equity line of credit (HELOC) works a little differently. A HELOC is a revolving line of credit that you can borrow from and pay back on a regular basis (similar to how you would use a credit card). You may borrow from your HELOC as often as you like, as long as you do not go over your limit. You do not have to keep reapplying once you have been approved for a HELOC on your property.

Finally, there is a third type of loan called a piggyback loan that some people also consider a type of second mortgage. This one is a bit different again however, because it is a side account that is an add-on to your primary mortgage. So essentially, you are purchasing your home using two mortgages – one of which you can borrow from should the need arise.

CAN YOU REFINANCE A SECOND MORTGAGE?

Before you decide to refinance a second mortgage, you will need to decide if it is in your best interest to do so. While refinancing can help you to consolidate debt or access more cash from your home equity, you need to be sure that you will be able to afford the new payments. Otherwise you are putting your home at risk.

Negotiate with your current second mortgage lender. Before you take your business elsewhere, it never hurts to ask your current lender if they would be willing to refinance your mortgage at a lower interest rate.

Compare rates of other lenders. Before you refinance with your current lender, do a little rate comparing with other lenders. This is one area where working with a mortgage broker can save you a lot of time and hassle!

Why might I need a second mortgage?

There are many reasons why Canadian homeowners might choose to get a second mortgage. One of the most popular reasons is to consolidate debt. If you have high interest debt from credit cards or other sources, you may be able to significantly reduce the amount of interest your pay by consolidating debt into a second mortgage. Depending on how much debt you have and the interest rate that you are currently paying, a second mortgage could help you to get out of debt years sooner. If you are trying to repair your credit, your first instinct may not be to get another loan, but since second mortgages can help you pay off your debt faster, they can actually be a great tool to help you repair your credit.

Another reason you might want to get a second mortgage is to borrow money for a larger expense. As mentioned, a second mortgage is much more affordable interest-wise than other loans like credit cards. For this reason, people often get second mortgages to pay for home renovations and other big-ticket items.
One final and very powerful reason to get a second mortgage is that with some second mortgage products, you can elect to pay interest only. This is a great option for people who are planning on selling their home but who haven’t sold it yet. Imagine being able to remodel your home to increase the sales price without having the high stress of having to pay principal on the renovation loan!

How to qualify for a second mortgage?

When you are applying for a second mortgage, there are four main areas that lenders will be examining:

  • Equity – This is the most important area since you need equity in your home to secure your second mortgage. The more equity you have, the larger the second mortgage that you will be able to qualify. Remember, that you don’t need to borrow the full amount that you get approved for.
  • Income – In addition to having the equity to borrow against, most lenders will want to see that you have the money to make the payments. Documents that might be required to prove your income include Notice of Assessment, your TD, and/or a letter of employment. If you are self-employed, you may be able to use other documents that prove the income of your company or contracts for future sales.
  • Credit Score – While you do not need to have a perfect credit score to qualify for a second mortgage, having good credit will help you to get a better interest rate.
  • Property – Finally, lenders will consider the property itself. Lenders need to imagine the “what if” scenario of you not being able to make your payments. In that case, you may need to sell your property in order to pay off the loan. Lenders will be more willing to give you a second mortgage if it is on a property that can be easily sold in the event of a default.

Is a second mortgage right for me?

If you would like to borrow from your home equity at a rate of interest that is better than what you would get from an unsecured loan, then a second mortgage can be a great option. Still, however there are other options you might want to consider as well such as mortgage refinancing. 

To determine which option is the best choice for you, it is recommended that you sit down with a professional mortgage broker to run some calculations. 

Advantages of getting a second mortgage.

Second mortgages are one of the more affordable types of debt. Although the interest rate will be higher than that of your first mortgage, it will still be considerably lower than unsecured debt such as credit cards or personal lines of credit. And since second mortgages are based on how much equity you have in your home and not your credit history, they can be a good option for people who may have bruised credit.

Contact Matrix Mortgage Global today!

If you would like to learn more about second mortgages and review how these financial tools can work in your favour, contact Matrix Mortgage Global today. A member of our team would be happy to go over your options with you.

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