6 Pros and Cons of Taking Out a Second Mortgage

A second mortgage (also known as a home equity loan) is a type of loan that you can take out on a home that you already have a mortgage on, and in which your house is used as collateral.

When you take out a second mortgage, you are essentially borrowing against the portion of your home that you own by accessing the equity you have amassed in it by paying off your first mortgage over time.

For instance, if your home is worth $500,000 and you have paid off 20% of this amount so far, you have $100,000 in equity. Your bank may allow you to access a portion of this equity to use for various purposes, such as paying for home renovations or consolidating credit card debt.

There are various types of second mortgages that you can apply for in order to access your home equity. For instance, a lump sum second mortgage allows you to access a single amount of cash all at once, which you can then pay back gradually through monthly payments.

You can also get a home equity line of credit (HELOC) that allows you to draw on the loan whenever you need it, and repay the amounts you receive the same way you would pay off a credit card.

The Main Pros and Cons of Taking Out a Second Mortgage

There are a variety of situations that encourage people to consider taking out a second mortgage, as it is a common way to access a substantial amount of cash in a short amount of time. However, before you do so, you should consider the pros and cons of taking out this type of loan.

The Pros

To begin, let’s take a look at a few of the biggest pros of taking out a second mortgage, which are as follows:

1. How you use it is up to you

One of the biggest advantages of taking out a 2nd mortgage loan is the freedom to use your home equity however you please. There are many situations to which people can apply the funds from their second mortgage payout, including the following:

• Debt consolidation: A second mortgage is a fantastic way to combine multiple debts under a single loan with affordable monthly payments. If you have unsecured debts, such as credit card debt, getting a second mortgage is an especially good idea.
• Pay for a large purchase: Whether you are planning on returning to university or would like to renovate your home, getting a second mortgage will allow you to cover significant expenditures that you cannot otherwise afford.
• Pay for everyday expenses: If you are getting overwhelmed by your bills, or are faced with some sizable emergency expenses due to an accident of some type, a second mortgage can alleviate that financial stress by granting you access to the funds you need.

2. Low interest rates

Another major benefit of taking out a 2nd mortgage loan is that you can access relatively low interest rates. This is especially helpful if you are using your second mortgage to consolidate your debts, as the interest rates are much better than those for unsecured loans.

For instance, most credit card companies charge between 20% and 26% interest, but the average second mortgage loan interest rate is currently between about 5% and 12%, depending on the type of loan you get.

3. Flexible payment arrangements

Most of the time, when you take out a second mortgage, you can extend your amortization period, which is the length of time you have to pay the loan back. With this kind of flexibility, you can customize your monthly payments to align with your income.

The Cons

Now, let’s take a look at some of the most significant disadvantages of taking out a second mortgage.

4. Most of tRisk of foreclosure

One of the biggest cons of taking out a second mortgage is the risk of foreclosure. Since a second mortgage is a secured loan that uses your house as collateral, if you fail to stay on top of your second mortgage payments, your house could be in danger of foreclosure, meaning your lender will take it from you and sell it to pay off your remaining debt.

5. Strict qualification criteria

Another downfall of taking out a second mortgage is the strict qualification criteria often required in order to be approved. Most lenders have requirements pertaining to your income, credit score, and debt-to-income ratio, which you must meet to qualify. You may be up against some exceptionally high standards, especially if you are trying to secure this type of loan from a major lender.

6. Fees

There are a few different types of fees that you typically incur when you take out a second mortgage. These include appraisal fees, legal costs, title insurance, and title search expenses.

How Canadalend Can Help You With the Second Mortgage Process

If you have weighed the pros and cons of a second mortgage and have decided that the advantages outweigh the disadvantages, Canadalend can help you connect with second mortgage lenders to ensure this process goes smoothly.

Whether you want to consolidate debts, pay for an addition to your house, or put your kids through university, securing a second mortgage loan through us can make your goals a reality. Our mortgage experts are happy to guide you every step of the way. 

We have access to a variety of second mortgage lenders in Ontario. Many of these lenders do not require income or credit qualifications, which means we can help set you up with an easy and expedited loan application process. 

We understand that everyone’s financial situation is unique, which is why we do not mind tailoring our services to meet your specific needs. When you contact us, we will schedule a free personal consultation to assess your needs and match you with a suitable solution. We will go over all of your second mortgage options with you and answer any questions or concerns you may have during this process.

For more information about how we can set you up with second mortgage lenders, or to learn about the various mortgage solutions that we have to offer, call Canadalend at 1-844-586-0713 or contact us here.