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Mortgages, private mortgages, second mortgages, home equity loans—how does someone know what type of loan is right for them? Differentiating can be difficult and mind-numbing.

Second mortgages might be a touch less popular than other methods but that doesn’t mean that it should be considered less. A review of second mortgages can convey that this is a proven method to obtain funds and, more importantly, if this is right for you.

Here are some of the more important factors that a borrower should know.

A Second Mortgage is a Proven Way to Access Funds Quickly

Think of a second mortgage as a way to tap into the available equity in the investment of your home.  You can adhere to the terms of your first mortgage and most likely avoid any penalties associated with refinancing.

Remember, you need to have a good amount of equity in your home to leverage a second mortgage.

You can Pursue a Private Lender for a Second Mortgage

If you are having trouble being approved for a second mortgage by a traditional lender like a bank or even where you have your first mortgage, then you can consider private lending options.

Private lenders typically have less rigid qualification guidelines and are more open to different agreements that result in a borrower being approved.

The Different Types of Second Mortgages

Second mortgages can be accessed as a separate loan or it can be remitted in the form of a home equity loan or line of credit secured by your home.

How the funds are made available comes down to your preferences and circumstances.

Second Mortgages Work Best as Short-Term Solutions to Financial Problems

There are many situations where a second mortgage can be useful. Since it can come with higher interest rates, penalties and additional fees, it is best employed in the short term to get a borrower over a financial hurdle such as home renovations or to open a business.

Depending on the situation a borrower finds themselves in, second mortgages can be a useful lifeline. Make sure you understand the details and ramifications and that you go into the arrangement equipped with an exit strategy.

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.

When applying for a loan, the application process and the lender’s checklist can be mysterious. Most borrowers recognize that factors like credit history, salary, debts, assets and price of home will play a part in whether you are approved or denied.

How do all these factors come together? What can applicants do to make sure they have the strongest chance at a mortgage, home equity loan, second mortgage or other financial products that are available?

Be Honest with Yourself About your Strength as a Candidate

Above all else, go into an application process understanding where your weaknesses might reside. If you don’t have a full-time job or you have a weak credit score or you have a large amount of consumer debt—these are all things you must speak to and rectify.

What do Lenders want to see in an Application?

Lenders want the process to be as clear and transparent as possible. They want to attract the right type of borrower, which means one that carries the least amount of risk.

At the top of the list, they want an applicant with a positive credit reputation, steady monthly income and one that can clearly demonstrate an ability to repay the loan.

Does it Matter Where the Money is Spent?

There are several variables that make a clear answer to this question murky.  If you are buying a home than the price and condition of the home matters, you might even be subjected to a home inspection.

If it is for home renovations, medical care or education, you usually don’t have to provide much further context.

Focus on these Parts of your Application 

To be a strong candidate, work towards bettering your credit score and ensuring you have some assets to your name. While these are easier said than done, small improvements in both can lead to a greater chance at approval.

For second mortgages and home equity loans, the more equity you own in your home, the more funds a lender can provide to you.

Applying for loans of all types can be complicated. The more boxes you check off, the more likely you are to receive exactly what you want with appealing terms.