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Get To Know About Second Mortgage & How It Works

When you buy a house, you are more than likely to make a down payment and work with a lender to borrow the rest of the funds to purchase the property. That exchange with the lender is called a mortgage. A mortgage is secured by using your house as collateral. In the event, the borrower of the loan defaults on payments, the mortgage lender can take possession of your house and sell it to recover the remaining money.

What is a second mortgage?

If you have built up more than enough equity in your house, you have the opportunity to take out a second mortgage as an additional secured loan and use your property as collateral. Even though the new loan will increase your debt, it gives you funds that can be utilized for consolidating high-interest debt, making home renovations, including taking care of other major expenses. It is often called a home equity loan, as the mortgage is tied to the built-up equity you have in your property. Get in touch with our mortgage broker today to find out more details about second mortgages.

How does a second mortgage work?

To apply for a second mortgage, you will need to follow the same procedure as you did for the primary mortgage. The procedure involves submitting an application to the lender and providing necessary documentation regarding your income, debts etc. Additionally, you will be required to get an appraisal to know the exact value of your property.

Don’t worry, our expert mortgage agent at My Mortgage Approved will guide you through the entire process.

What are the different types of second mortgages:

Borrowers who are considering taking out a second mortgage have two options to choose from:

1. Home equity loan

A home equity loan comes with a monthly payment that is fixed. You will receive the funds upfront and pay it back with interest over time. You can use a home equity loan calculator to help with that.

2.Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit gives borrowers the option to access the built-up equity in their properties. However, the borrower is only charged interest on the amount they borrow. This can be a fantastic option if you are unsure how much equity you are looking to borrow.

If you need help applying for a second mortgage, speak with our mortgage broker today.

Various uses of a second mortgage:

1. For property improvements

If you don’t have cash on hand to make improvements, a second mortgage can be beneficial. Additionally, the funds from a second mortgage may be tax deductible if they are used for home improvements.

2. To pay off high credit card debt

With a second mortgage, you can use the funds to pay off high-interest credit card debt, and even take care of unexpected future expenses.

3.Refinance and avoid mortgage insurance

If you borrow more than 80% of the equity in your property on your first mortgage, then you are required to apply for mortgage insurance. Some lenders allow you to borrow up to 100% of your property value on a refinance without charging for mortgage insurance.

4. You need money to purchase a house before your current property sells

Timing the sale of your current home and purchasing a new house can be difficult. If you need to purchase a new house before the sale of your existing home gets completed, you can take out a second mortgage to cover the profit you are expecting from your current home. When your old home eventually sells, you can pay off the second mortgage with proceeds received from the sale.

Advantages of a second mortgage:

You have the option to access the equity in your property without refinancing your first mortgage.

Lower interest rates when compared to credit cards or personal loans.

Second mortgage interest can be tax deductible if the money is used for home renovations or to purchase.

  • You can avoid paying mortgage insurance by purchasing a house with less than 20% equity.

Should you get a second mortgage?

Before you consider getting a second mortgage, you should evaluate the risks to ensure this type of financing meets your financial requirements. The main reason to get a second mortgage is to utilize the funds to increase the value of your property.

If you plan on getting a second mortgage to pay off debt, purchase a car, or even pay off your children’s post-secondary education, be wary, as the equity present in your property is an important asset.

For more details about second mortgages or if you need help applying for one, please speak with our mortgage agent today.

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