A second mortgage is basically what its name says it is. It is a kind of loan that a homeowner can take using the home as the collateral while still having another loan secured by the same house.
In other words, a homeowner will be adding to his or her overall debt burden by taking a second mortgage. An increased debt burden can result to more financial difficulties in case the homeowner will have some issues that will affect his or her ability to repay his or her debts.
Before taking a second mortgage, you have to know that they carry higher interest rates. This means that there will be a higher chance of losing your home in the event that you fail to repay your loan. You’ll have to be absolutely sure that you’re ready to take on that possibility.
Ready to know more about second mortgages? Then continue reading below!
2 Common Types of Second Mortgages
- Home Equity Loans
A home equity loan is a second mortgage that will allow you to get a lump sum of money as a loan based on the equity of your home. The catch is that you’ll be required to repay the loan via instalment over a fixed period of time.
- Home Equity Line of Credit (HELOCs)
A home equity line of credit is a second mortgage that works like a credit card. It allows you to have a credit limit that you can continue reusing as long as you also continue paying the balance.
Note that the amount that you’ll get for HELOC and Home Equity Loan will greatly depend on your available equity and your lender’s lending standards. There are also ‘open-end’ second mortgages that will allow you to take out cash up to your maximum credit amount and will let you do so again as you pay down the balance. On the other hand, second mortgages that will not allow you to redraw after receiving up to the entire loan amount upfront also exist, and are called ‘close-end’ second mortgages.
Use Your Second Mortgage Wisely
Because paying off a second mortgage isn’t easy, you may want to use a second mortgage in ways that can help you off in the long run. More so, knowing whether you’ll be using your second mortgage to buy a new car, pay for improvements in your home, or paying for tuition, will help you decide which type of second mortgage would be best for you.
What do we mean by this?
Let’s say you want to make one large purchase, then the ideal type of second mortgage for you would be a Home Equity Loan with a fixed amount (and also fixed payment). This way, you can get the money you need and plan for payments later. On the other hand, if you need small amounts every now and then, a HELOC would be ideal for you.
How about using your second mortgage to pay off other loans?
That wouldn’t be a smart idea because you’ll just end up paying for interest in the long run. What you’ll be doing is just getting another loan to try to pay off an existing one. It would be a bad cycle to get yourself into.
Second Mortgage Considerations
Having a second mortgage means another bill that you’ll have to pay-off monthly. You have to be sure that you will be able to handle your monthly expenses before taking on any new payment responsibilities. It would be best to contact a mortgage specialist to help you evaluate whether a second mortgage would be right for you. A mortgage specialist would also be able to advise you on other options such as mortgage refinancing or perhaps going for a private mortgage.
To inquire about a second mortgage in the Toronto area or to learn more, please visit us at: https://www.homebasemortgages.ca/second-mortgages/