Is a Second Mortgage Right for You?

Posted on 4th September 2015

If you’re a homeowner in North America today, you might be over budget on current home renovations, behind on your mortgage payments, drowning in student debt, or struggling to consolidate debts in other areas of your life. These situations can make life a stressful journey to bear on your own, but you no longer have to suffer with debt weighing you down.

If you relate to the feeling of stress or the financial burden and worry, then you might be the perfect candidate for a second mortgage.

What Is a Second Mortgage?

A second mortgage is a second loan that is secured against the equity in your home. With a traditional second mortgage, you can borrow up to 85% of the appraised value of your home, minus the amount left to pay on your first mortgage.

A second mortgage, as the name implies, is a mortgage loan taken out after the first mortgage is already in place. It does not replace the first mortgage. With a second mortgage, a homeowner will take out a separate mortgage with a different lender. This means that while you make payments on your second mortgage, you will also continue to make payments on the original, first mortgage.

The term second mortgage is used in part because it is second in priority if you happen to default. If you do, the first mortgage gets paid off before the second one does. A second mortgage is thus considered riskier for mortgage lenders. To compensate for this additional risk, interest rates on second mortgages are higher than on the first, or principal mortgages.

Second mortgages are one way to wisely consolidate multiple debts, which is why many homeowners take out a second mortgage on their property. They can then use that money for anything from home renovations, to their children’s education, investing, or even to pay off debt.

Top Ways to Refinance

To qualify for a second mortgage, lenders will look at how much equity you have in the home. The more you have available, the better your chances for qualifying for a second mortgage. They also want to ensure you have a dependable source of income, so you can make these additional payments. Lenders will also look at your credit score. The higher your score, the lower your interest rates.

For homeowners with more than 20% equity in their homes and good credit, a popular, affordable second mortgage will be a home equity line of credit (HELOC). A HELOC is a revolving line of credit that accesses up to 65% of the value of your home. You receive a commitment for an agreed upon amount and use only what you need. You also only pay interest on the amount you use.

If, however, a homeowner has bad credit and/or little equity built up in their property, they may want to consider getting a second mortgage through a trust company, smaller bank, or private lender. A more traditional second mortgage is for a specific amount and repaid with monthly payments. Here you can borrow up to 85% of the appraised value of your home, minus the amount left to pay on your first mortgage.

Sample Case Study

Samantha and her husband, Jeremy, have been struggling financially for years, and they can’t seem to get themselves back on their feet and out of debt. They have a mortgage on their current house but are behind on their payments. They’ve been racking up credit card debt over the years and don’t know what they’re going to do next. Lucky for Samantha and Jeremy, there is a financial solution.

Step 1: Samantha and Jeremy call for financial advice.

Step 2: introduces Samantha and Jeremy to the option of taking out a second mortgage, which is a loan at a lower rate of interest than conventional credit card loans.

Step 3: Samantha and Jeremy have plenty of equity in their current home and are able to take out a second mortgage.

Step 4: With the immediate cash, Samantha and Jeremy are able to pay off the urgent debts that were completely ruining their lives.

Step 5: With monthly payments they can meet, at a fixed interest rate, Samantha and Jeremy are on track to financial freedom!

If you are out of options and struggling with debt, we’ll take a look at the equity in your home and determine if a second mortgage is the right option for you.

FAQs about Second Mortgages

Are second mortgages a good idea?

The idea of taking out a second mortgage sounds daunting. After all, you’re taking on an extra monthly payment. But, under the right circumstances, a second mortgage can actually save you money.

The interest rate on a second mortgage will be higher than the interest on a primary mortgage. That’s because a second mortgage is second in line to be paid off should you default on the loan. As a result, the risk is higher for the lender of the second mortgage. While the interest is higher on a second mortgage, it is still significantly lower than the interest charged on short term debt like credit cards.

Why would you take out a second mortgage?

Many Canadians take out a second mortgage to help them consolidate debt. If you’re overwhelmed by credit card debt, car loans, or other high interest debt, a second mortgage can help you consolidate your debt.

Instead of having numerous high interest debt payments, you have one, lower monthly payment at a lower interest rate. That translates into a whole lot of savings.

More and more Canadians take out a second mortgage to pay for things like home renovations or to help pay for their children’s tuition. Second mortgages are also a good idea if you want to tap the equity you’ve built up in your home but you’re in the middle of your mortgage term and you don’t want to deal with the fees associated with refinancing your current mortgage.

Is it easy to qualify for a second mortgage?

Even though you already have a mortgage, and have maybe never missed a mortgage payment, there is no guarantee you’ll be able to secure a second mortgage with Canada’s big banks. In order to qualify for a second mortgage, traditional lenders will look at equity, income, credit score, and property.

  • Equity: The more equity you’ve built up in the property the better chances you are of qualifying for a second mortgage.
  • Income: Banks and trust companies want to make sure you make enough money to make payments on your second mortgage. If you’re an entrepreneur or self-employed and have unreliable income, traditional lenders may not be able to verify you earn enough.
  • Credit Score: The higher your credit score, the lower your interest payments.
  • Property: Even if you do well on the other three factors, the big banks may not want to give you a second loan because they do not like the property they are lending on. If for some unfortunate reason, the bank forecloses, it needs to secure their investment. If it doesn’t think it can turn it over quickly, it may turn you down for a second mortgage.

Can you sell your house if you have a second mortgage?

You can absolutely sell your home if you have a second mortgage. The money from the sale of the property goes to pay off the primary mortgage first and then the second mortgage. You get anything that is left over.

The only time a homeowner with a second mortgage could run into trouble when selling their property is if home values have fallen. It is possible that the sale of the property does not generate enough cash to pay off the first and second mortgage. Helping You Find the Best Low-Rate Second Mortgages

If you’re looking for a second mortgage and want to know what you can afford, it’s important that you work with a mortgage broker that has a proven track record of helping clients find the best financial products at the best rates. A second mortgage that not only meets your financial needs but also your long-term lifestyle needs.

Canada’s big banks and traditional lenders need to follow strict lending guidelines set out by the Federal Government. Private lenders, because they are private, are not subject to the same rules; they are much more flexible, which means they can be a much better option for homeowners.

The licensed, independent agents at will help you make the most informed decision possible when it comes to getting a second mortgage. To see what kind of second mortgage is right for you, contact today. Or apply online and a and one of our lending specialists will help you set up an appointment for a free, personal consultation.

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