Are you familiar with the concept of a second mortgage? You have probably heard the term floating around before, and maybe you’re wondering whether it’s an option for you as a homeowner. These products can be beneficial, but it’s certainly important to make sure you are a good candidate for one before jumping in. Let’s explore the basics of what these mortgages are, how they work, and who they can help!
So, what exactly is a second mortgage?
This product really is just another mortgage you take out on your property, second to your primary mortgage. While the definition sounds simple enough, however, this obviously opens up a whole host of other questions. When do you pay it off? How exactly does it work? Can anyone get one? And, perhaps most commonly asked, why would someone want a second mortgage?
A second mortgage must take second place to your primary mortgage in all respects. Your first mortgage is your priority because, if you were to default on your mortgage, you would have to pay off your primary one first. This means you must have full control over the payments on your first mortgage in order to secure a second. The second mortgage itself comes from your home equity you have built up, so you’re turning that equity into a new loan. It largely follows the same structure as your primary product. You are set up with an interest rate and you make monthly payments.
Who can get one?
Now, not everyone can secure a second mortgage. As we touched on above, borrowers need to be able to access enough home equity to support one. Homeowners who have not been in their homes for long enough will not be able to meet that requirement. Also, securing the financing can sometimes be tricky. If your current lender does not offer second mortgages – and many traditional or bank lenders do not – you might have to turn to private lenders. This means qualifying with a new lender, and likely a higher interest rate. Just like with your primary mortgage, there are certain hurdles you have to clear in order to get a second one.
What are the potential benefits?
We know what a second mortgage is, and who might qualify for one, but the big question remaining is why you would ever want one. Homeowners who take out another mortgage do so to access home equity for a specific financial purpose. If your home has value, and you are in need of some extra cash flow, this is a way to take that value out of your home and bring it to life. For example, some homeowners might want to have financing available to support major home renovations or other projects. Second mortgages don’t have to be used for homeownership purposes, either. Any big expense, like post-secondary education, for instance, can receive the support you will access from this product.
This product can provide a certain amount of relief to homeowners looking to increase their cash flow. However, there are still certain risks to keep in mind.
What are the risks?
It’s important not to underestimate the potential consequences of a second mortgage. Most importantly for many people is the fact that these mortgages can come with much higher interest rates. Since this mortgage is a second priority, lenders know you are automatically going to put your primary mortgage at the top of your list. Having that knowledge means lenders will take extra measures to ensure their own protection. This means you will have to pay higher rates for this product. You must ensure you can afford to pay the interest on both of your mortgages to avoid future penalties and fees. Your two mortgages will depend on one another to flourish, so be mindful of your duties to them both!
Where should you start?
If you think a second mortgage sounds like a product that would suit you, there are some important steps you must take. One of the first things you need to do is get in touch with a broker! Second mortgages can be confusing, so using a mortgage broker will definitely help clear up the process. We can assist you with finding potential lenders, navigating interest rates, and deciding if you can support this additional loan. Another important item to address is securing an appraisal on your home. Lenders will need to know how much value your home has, so they can be sure there is sufficient equity to support a second mortgage. This is another good reason to visit a broker – we can help you ensure you understand the entire process, from start to finish!
If you have any questions about your mortgage, get in touch with me!