Homeowners who have enough equity in their homes can take a second mortgage. This type of loan can be advantageous for those who require funds to pay off debts or finance home renovations. However, it can also pose potential risks. To help you make an informed decision, we as a Mortgage Broker Burnaby have provided all the necessary information you need to know about second mortgages before starting the application process.
What is a Second Mortgage?
A second mortgage is a loan that allows you to borrow against the equity in your home, even if you already have an existing mortgage. Your home equity is calculated as the difference between the value of your home and the amount of debt you owe on it. Sometimes, a second mortgage can be used to refinance or purchase a home with a first mortgage.
The term "second mortgage" refers to the order in which lenders are paid if the borrower defaults on their loan and the property are foreclosed upon. The first mortgage lender is paid first, and only after that loan is satisfied will the second mortgage lender receive any payment. If there isn't enough equity in the property to satisfy both loans, the second mortgage lender may not receive full payment. Due to the added risk, second mortgage rates are often higher than first mortgage rates.
Types Of Second Mortgage
Two types of second mortgages are available: home equity loans and home equity lines of credit (HELOC). Both allow homeowners to borrow against their home equity.
Home equity loans are second mortgages with fixed interest rates, although some may have variable rates. These loans provide the entire loan amount upfront.
On the other hand, HELOCs operate like credit cards, allowing borrowers to access funds up to their credit limit as needed. The interest rates on HELOCs are adjustable, meaning they can fluctuate. To access funds from a HELOC, borrowers can use a credit card or write a check and repay the debt monthly.
Unlike first mortgage loans, which can have loan terms of 15 or 30 years, home equity loans and HELOCs are typically paid off much faster. While some fixed-rate home equity loans may have 30-year terms, these mortgages usually have five to 15 years repayment periods.
How To Get A Second Mortgage
There are various options for second mortgages, as many lenders provide this service. You can select a different lender from your initial home loan provider, such as a bank, credit union, or online lender. Comparing lenders is recommended to find the best rates and terms for your second mortgage.
Applying for a second mortgage is similar to applying for a primary home loan. You'll undergo an underwriting process where the lender reviews your credit and financial history. If you have a good credit score and meet the lender's criteria, you may be eligible for a loan of up to 85% of your home equity.
The Benefits Of a Second Mortgage
One of the benefits of second mortgage loans is their flexibility in financing various projects. The type of second mortgage that suits you best will depend on the amount of money you need and the purpose of the loan.
If you require a fixed sum for a one-time expense, such as a family member's retirement party costing $6,000, a home equity loan may be more suitable than a HELOC. Home equity loans are also helpful for homeowners seeking significant financing to consolidate other loans or assist their children in paying for college.
On the other hand, a HELOC is preferable if you are unsure about the duration of your financing needs or if you require varying amounts of money from month to month. HELOCs enable you to pay for a small home renovation project or a series of unexpected emergencies over time.
Furthermore, one advantage of acquiring a second mortgage is the potential tax deductibility of the mortgage interest. If you possess a home equity loan or a HELOC, you may be eligible for a deduction of up to $100,000 of that debt or the amount of equity you hold in your home, depending on which is smaller.
Drawbacks Of Second Mortgage
When considering a second mortgage, it is crucial to consider the potential drawbacks. Repayment is necessary, as your home acts as collateral, and your lender can foreclose and seize your property if you fail to repay the loan. Second mortgages are subordinate to primary mortgages, so if you default, the first mortgage lender is paid before the second mortgage lender. This makes home equity loans and HELOCs riskier than traditional home loans and usually results in higher interest rates. Additionally, closing costs for second mortgages range from 3% to 6% of your loan balance, making refinancing more complicated.
While home equity loan payments are generally easier to manage due to their predictable monthly payments, HELOC payments can vary, potentially leading to difficulty paying if the amount is significantly higher than before. Taking out a second mortgage to pay off existing debt can damage your credit score and lead to years of repayment to lenders.
Can you use a second mortgage to pay off the first mortgage?
A second mortgage is utilized for a variety of uses, but even though it could be used to repay some of the principal loans, it is designed to be used to cover other financing and debt needs such as:
- Costs of home renovation
- Consolidation of household debts into one simple monthly payment
- The tuition payment or requirements of adults, like helping to make the down payment for your first property
- To fund the most-needed repairs for your home
- Personal financial needs
Mortgage Broker Burnaby Is Here To Help You Getting A Second Mortgage
Second mortgages can offer borrowers the flexibility to tap into the equity they have built in their homes, providing a safety net when unexpected financial challenges arise. As a Mortgage Broker Burnaby, we work with a range of private lenders nationwide, and we help you make the right decisions regarding private lending. Contact us anytime for assistance in achieving your goal of obtaining a second-home mortgage.
No comments yet