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Most people don’t think of second mortgages as something that could be useful in a lot of different situations. It’s a way to get cash quick, to pull equity from your strongest asset and to solve short-term financial problems.

With any loan or situation where your home will act as collateral, it’s best to know the right time to consider this option and why it can be promising under the right circumstances.

What is a Second Mortgage?

This is a good place to start. A second mortgage is a mortgage taken out on a property that is already mortgaged. It uses your home as collateral and secures a loan like when you first purchased your home. The processes for both are similar.

What can a Second Mortgage be used for?

Once approved, it’s your money and can be used in any way you see fit. This doesn’t mean that all uses of a second mortgage are created equal, but it’s a lump sum for you to spend.

When Should Someone Consider a Second Mortgage?

There’s a lot of good reasons to consider applying for a second mortgage.  The first thing to consider is whether there is enough equity built into your home. If you’ve been paying off your mortgage for several years, it’s a good bet that there is.

Second mortgages are effective if you need a large sum of money and the popular reasons to apply are home improvements, debt consolidation, education or medical expenses. By no means, are these the only reasons though.

Are there Different Types of Second Mortgages?

Second mortgages can come in the form of a line of credit or as a more traditional loan. It comes down to what the applicant is more comfortable with as there is no right type.

Second mortgages shouldn’t be viewed as scary or that different from other methods of borrowing. Although there’s interest, it’s a way to access funds when needed and to leverage the investment of your home.

As with anything of this nature, it is always best to speak with a trained and knowledgeable professional.

While not always the case, most people earn more as they gain more experience in their field. From there, the more one earns the more they can afford or the better they will appear to a financial lender.

For loan borrowers, especially first-timers, a challenge comes from agreeing to the terms of a lender when you are not at your peak financial state. This means potentially receiving a lesser amount, paying higher interest rate or not being eligible for better terms like having to pay your loan off in more years.

Finances shift. Refinancing allows you to shift in conjunction.

Align your Finances with your Loan with a Strategic Refinancing Plan

If you’re earning more money or have paid off other debts, it might be good to consider refinancing your mortgage. This way you can pay off your mortgage faster or receive a lower interest rate because your finances have improved.

On the flip side, if your finances have worsened and you need a lower monthly payment, then refinancing might be a necessity.

Interest Rates Should Dictate when you Refinance

If there are whispers of a hike from the Bank of Canada, then consider refinancing to secure a lower fixed rate for a longer period. If rates drop and you’re not locked into a fixed term than it would be wise to consider refinancing.

Monitoring interest rates and the Bank of Canada is important so that you know if you need to act.

Has your Credit Score Vastly Improved?

Along with interest rates, your credit score is a number you want to monitor on a consistent basis. If you applied with a weak or poor rating, then once you move the needle to strong or excellent, refinancing could result in better terms for you.

Refinancing is a powerful tool in a borrower’s arsenal but it should be employed only at opportune times. It can be a reward for improving your financial situation or it can be in response to the market. Either way, make sure that it is something you consider.

Life happens and when it does it can be costly. Lots of people seek out additional funds for business ventures, cash flow shortage, medical expenses, travel, home renovations, to name a few.

Once you’ve decided to take advantage of your home equity, the next decision will be about what loan offers you the most. Two options will most likely be available: a second mortgage or a home equity loan (which can also come in the form of a line of credit).

To avoid any further confusion between the two, let’s break down their similarities and their differences.  

What are the Similarities Between a Second Mortgage and a Home Equity Loan?

At first glance and to the untrained eye, these two types of loans probably appear very similar. They both borrow against the equity in your home. The criteria for approval is nearly identical. They seem to have more in common than they do separating them.

How do Second Mortgages and Home Equity Loans Differ?

A home equity loan acts more like a traditional loan in the sense that money is made available to you and you repay a set amount based on the agreed upon terms. Repayment usually takes less time than a second mortgage. While it does involving using your home as collateral it is independent of your mortgage.

A second mortgage provides a fixed amount of money that must be repaid on a fixed schedule. Staring with the application process (based on credit history, interest rate and price of home) and including your repayment terms, it should look and feel like your first mortgage.

Second mortgages are typically 15 to 30 year loans with a fixed rate. The catch is that the rates can be a touch higher but the fees can be lower.

Your Financial Needs are the Biggest Differentiator

If you need money for a singular reason, such as a one-time expense like a home renovation than a second mortgage might make more sense. If you require access to a pool of money to pay for tuition or several home repairs than a home equity loan or line of credit is probably more suitable.

This can get murky so the best advice is to sit down with an expert and allow them to guide you through the pros and cons of each with your specific situation in mind.

Canadians are sitting on record debt. According to Statistics Canada, we owe almost $1.70 in debt on every $1.00 of disposable income. That’s a lot of outstanding debt. Fortunately, the Canadian housing market is strong. This means you might have built up a lot more equity into your home than you think.

It can be difficult to get out of debt, especially when you’re trying to pay off high interest credit cards, auto loans, or other consumer debt. If you’re a property owner though, you can tap into the equity you’ve built up in your home and use it to consolidate outstanding debt.

Why should you borrow against your home to consolidate debt? Through debt consolidation, you can take advantage of lower interest rates; simplify your finances by moving to one easy, monthly payment; and improve your credit score.

Below are the most popular ways in which homeowners can consolidate debt.

Does a Second Mortgage Make Sense?

A second mortgage is also referred to as a home equity loan. With a second mortgage you can borrow up to 85% of the appraised value of the property (minus the outstanding balance of the primary mortgage).

A second mortgage does not replace your primary mortgage, but it does operate like the first mortgage. You get a fixed amount of money that is payable over a fixed period of time; usually at a variable interest rate.

When you take out a second mortgage you are now responsible for making two payments; payments on the original mortgage and the second mortgage.

There are a lot of advantages to taking out a second mortgage to consolidate debt. The biggest benefit of a second mortgage is the lower interest rate. Where some credit cards can charge interest as high as 30%, interest on a second mortgage is calculated at a variable rate plus prime. Not all lenders are the same though, some will offer a second mortgage at a fixed rate.

There are many other advantages of taking out a second mortgage to consolidate debt:

• Immediate access to cash
• Can be used for whatever you like
• Lower monthly bill payments
• Paying off debts improves your credit score
• A great option for those with bad credit or a previous bankruptcy

There is a downside to taking out a second mortgage, however. Because it’s secured against your home, the lender will come after it if you default.

What About a Home Equity Line of Credit?

A home equity line of credit (HELOC) is another popular way to consolidate debt. It might sound like a home equity loan, but it’s very different. The only real similarity is that they are both secured by your home.

A HELOC is a revolving line of credit that lets you borrow against your home equity. Unlike a home equity loan, which is a lump sum payment you need to start paying back immediately, with a HELOC, you can use as much or as little as you need. You only have to pay interest on the amount you withdraw. A HELOC limit can also increase as the equity in your home grows.

The interest rate on a HELOC is calculated daily at a variable rate plus prime. Because it’s variable, the interest rate can change daily.

With a HELOC, you can access a maximum of 65% of your home’s value. On top of that, the HELOC and balance on the home cannot equal more than 80% of the home’s value.
It’s easier to get approved for a HELOC than for a first mortgage. You already own your own property and started to build up equity in it. And the lender uses the property as collateral for the HELOC.

To get a HELOC, all you will need to do is get a home appraisal, verify how much home equity you’ve built up, and provide proof of income.

A HELOC is one of the most popular ways for Canadians to consolidate debt. It is also a convenient way to access money for home renovations, trips, tuition, or any other expense, planned or unexpected.

Or a Traditional Line of Credit?

A traditional line of credit can also be used to help consolidate debt. Since the recession though, it’s become more difficult to qualify for a line of credit. To qualify for a line of credit, a lender will want to make sure you have a good credit score, income, and positive net worth.

A line of credit can either be secured or unsecured. Secured lines of credit are secured against your home or other assets. This allows you to borrow more money at a lower interest rate.

While the approval process for an unsecured loan may be quicker than a secured line of credit, they are actually more difficult to get because you need to have a good credit score. That’s because the loan is not secured against any collateral or assets.

Moreover, you might get an unsecured loan more quickly, but the amount will be less than with a secured line of credit and the interest rate will be higher.

No matter which one you qualify for, a line of credit acts like a credit card. You are spending money you don’t have and there is a predetermined limit. You also need to make a minimum monthly payment.

Canadalend.com, Helping You Consolidate Your Debt

If you have built up equity in your home, there are a number of great ways for you to consolidate debt and pay off high interest credit cards or loans. Which method you chose will depend on where you are at and what your financial goals are. Do you want a lump sum payment with a fixed or variable rate or a revolving HELOC with a variable interest rate tied to what you borrowed? The licensed, independent mortgage experts at Canadalend.com can help you.

To find out how you can consolidate your debt, contact Canadalend.com today. Or apply online and a Canadalend.com lending specialist will help you set up an appointment for a free personal consultation at your earliest convenience.