4 Things You Probably Didn’t Know about Second Mortgages

Posted on 14th May 2024

Most people are familiar with the term “mortgage”—taking out a loan from the bank to help cover the payment of a house when you cannot afford to pay the full amount in its entirety.

When you take such a loan from a lender, the property itself gets used as collateral. Thus, it is necessary for you to pay this loan back to the lender on a monthly basis in fixed increments along with interest to avoid losing the house.

While this process is common knowledge for most, as the vast majority of people cannot purchase property without a mortgage loan, fewer people possess the same level of understanding about second mortgages.

A second mortgage is a mortgage you can take out while your original mortgage is still in effect. This allows you to access a significant amount of cash, usually in the form of a lump sum.

Like a first mortgage, this loan must be paid back in increments over a set period of time at a fixed or variable interest rate. The amount that you are able to borrow depends on the amount of equity that you have built up in your house. Equity is the value of the portion of the house that you technically own after having paid off your first mortgage.

4 of the Most Commonly Unknown Facts About Second Mortgages

Most people are more comfortable applying for a first mortgage rather than a second one because of their level of familiarity with it. Still, it is important to understand second mortgages, too, in the event that you ever need one.

Because second mortgages share some similarities with first mortgages, there is a lot of grey area surrounding this type of loan. The following are some of the most commonly unknown facts about second mortgages:

1. Second mortgages typically come in two main forms

While there are technically a number of different forms that second mortgages can come in, the two main types are a revolving home equity line of credit (HELOC) and a closed second mortgage.

A HELOC, which usually has a variable interest rate, is a revolving line of credit secured against the equity of your home. This means that after using a portion of it and paying it back, you continue to have access to the funds should you require them again, functioning like a credit card.

On the other hand, a closed second mortgage will provide you with a lump sum payout all at once. This loan generally has an interest-only payment structure, which involves you paying it back on a month-by-month basis.

2. A second mortgage is a secured loan

Another element of second mortgages that most people are unaware of is that they are typically secured loans, which means that your house serves as collateral.

Thus, if you are ever in a situation where you cannot pay back the loan to the lender, they could potentially initiate a “Power of Sale” or put a lien against the property to guarantee that the outstanding debt will be paid.

It is incredibly important to understand the risk of losing your home if such circumstances arise before you sign on for a second mortgage, as this should not be taken lightly.

3. The most common uses of a second mortgage

How are people supposed to know if they could benefit from a second mortgage if they do not fully understand what this type of loan is commonly used for? The majority who opt for a second mortgage tend to use it for the following things:

Debt Consolidation

Getting access to a hefty chunk of cash can help those who are facing serious debt to pay off these debts and combine them into a single payment that is easier to manage.

Using a second mortgage in this way to pay off unsecured debt has a number of advantages, as it often helps reduce the amount you are spending on interest while also improving your credit score, thus increasing your chances of accessing more favourable lending options down the line.

Home Renovations

Another factor that encourages people to apply for a second mortgage is the prospect of renovating homes. Revamping a house is one way to really make it feel like home while also boosting its market value. However, it is difficult to take on such a project without a steady flow of cash to fund it, which is why a second mortgage could help.

4. Second mortgages come with fees

Although a second mortgage can be incredibly helpful to many people, it is essential to understand the cost, as there are several fees that must be paid as part of this process.

Some of the most typical costs associated with a second mortgage include brokerage, appraisal, closing, and legal fees, which could easily add up to several thousand dollars altogether.

This is why it is critical to consult with a reputable and reliable mortgage broker before making a final decision regarding a second mortgage. They can best explain the exact costs that you will be facing before any contracts get signed.

How Canadalend Can Help You Secure a Second Mortgage

Now that you know more of the specific details pertaining to a second mortgage, if you believe that you could benefit from this type of loan, and you would like to apply for a second mortgage in Ontario, Canadalend has you covered.

No matter the reasoning behind your desire for this loan, our lending experts are happy to advise you every step of the way to ensure that your needs are satisfied throughout this entire process.

Someone from our knowledgeable and experienced team would be glad to sit down with you to discuss your personal circumstances so that we can ensure our advice best suits the particulars of your situation.

We have access to a variety of second mortgage lenders located in Ontario, including many who do not require certain income or credit qualifications. With years of experience under our belts, we are used to fine-tuning our approach as needed, and it is always our top priority to ensure our clients get the financial support they need.

We will gladly set up an appointment for a free personal consultation to discuss your interest in a second mortgage and advise you about how we can help you reach your financial goals.

For more information on how we can help set you up with a second mortgage that works for you, or to learn about how we can connect you with top-quality lenders, call Canadalend at 1-844-586-0713 or contact us here.

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