Second mortgages can be a powerful financial tool for homeowners looking to tap into the equity of their property. Whether you’re considering a second mortgage for home renovations, debt consolidation, or other major expenses, understanding the key facts about this financial instrument is crucial.
In this comprehensive guide, we’ll delve into four essential facts about second mortgages in Mississauga, providing you with the knowledge you need to make informed decisions about your home’s equity.
What is a second mortgage?
A second mortgage is simply a loan that is taken out against your home equity. Your home equity is the value of your home minus what you still have left owing on it. When you take out a second mortgage, you do not have to break your first mortgage. Usually the interest rate on a second mortgage is slightly higher than that of your first mortgage but this type of loan is also usually short term as well – so it can be an inexpensive way to borrow money when you need it.
Why would one need a second mortgage?
Homeowners in Brampton use second mortgages for all sorts of purposes from consolidating debt, to getting the cash they need to start a business or to finance a home renovation. It is very cost effective and interest rates are considerably lower than they are for other types of loans such as credit cards.
And since getting a second mortgage does not require you to break your first mortgage, you don’t have to worry about paying a financial penalty either.
Why get a second mortgage?
When you need to borrow money, you will have various options of how to do so. This may include credit cards, personal lines of credit, bank loans, etc. A second mortgage is most suitable when you need to borrow a larger sum of money. It is a good option, because it is a secured loan which means your interest rate is going to be lower than it would if you borrowed through an unsecured loan (like a credit card).
There are various reasons why homeowners choose to get a second mortgage, however some of the more common reasons are:
- To consolidate higher interest debt.
- To finance a large expense such as a home renovation.
- To obtain money for a down payment on another property.
What Kind Of Interest Rate Can I Get With A Second Mortgage?
Generally speaking, the interest rates on second mortgages are slightly higher than what you’d be able to get on a first mortgage, but much lower than what you could get with an unsecured loan like a credit card or even a personal line of credit.
The interest rate that you can qualify for will also depend on other factors such as your credit rating and whether you can get approval from an A lender or if you need to work with a private lender.
What You Should Know Before Getting a Second Mortgage:
Second mortgages can be a useful tool for those that need to borrow money for large home improvement projects, consolidating debt, and other large expenses, however there are certain things you should know before you decide to proceed.
- The interest will be higher than that of your first mortgage. Although second mortgages still cost less than most other types of loans, you can expect the interest to be higher than your first mortgage.
- You are using your home as collateral. Before you get a second mortgage, you should review your ability to make the payments since by failing to do so you could be risking your home.
- They are available from a variety of lenders. It is possible to simply go to your bank to get a second mortgage, but since there are so many lenders with so many different specialities, it is to your advantage to work with a mortgage broker who can compare products and help you choose the right lender for you.
Four Facts You Should Know About Second Mortgages
Fact #1: Second Mortgages are Best for Short Term Needs
The money that you get from a second mortgage may be spent on anything you choose, whether it’s for consolidating debt or paying for an emergency expense. The term on a second mortgage however is usually shorter than that of a first mortgage, so second mortgages are best suited to help you with short term needs.
Fact #2: Your Mortgage Broker is the Best Source for Your Second Mortgage
Even if you already have a first mortgage through a traditional lender, if you are in financial straits that lender may consider you too big a risk for a second mortgage. In this scenario, a private lender may be your best bet but you want to make sure that you work with a lender who is reputable. By arranging a second mortgage through your mortgage broker, it helps ensure that the lender that you finally end up working with has been vetted.
Fact #3: Refinancing May be a Better Option
The difference between a second mortgage and refinancing is that a second mortgage is an additional loan while refinancing means breaking the mortgage you already have and rolling the added debt into a new mortgage. To determine which option is better for you, your mortgage broker will compare the cost of potentially breaking your current mortgage to the interest you might save in refinancing vs. getting a second mortgage. The best option will vary according to circumstances.
Fact #4: You Should Have a Plan to Pay it Off
If you do opt for a second mortgage, it is important to consider how much extra you will be paying each month and develop a plan to pay it off. Second mortgages typically have higher interest rates than first mortgages, so it is to your benefit to pay it off as quickly as possible.
A Second Mortgage May Be The Best Solution For You If:
- You were already turned down by the bank for a traditional mortgage loan
- You struggle with poor credit
- You have income that cannot be verified
- You do not have time to wait for the approval process of a traditional loan
- You have unconventional mortgage needs (such as for residential or mixed-use properties)
Do you still have some questions about second mortgages? Contact AKAL Mortgages to gain valuable insights or apply online today. If you’re looking for a chance to win some extra money, why not enter our Mortgage Sweepstakes? It’s our way of showing our appreciation and giving back to you.
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