As a Grimsby mortgage broker, I deal with many customers looking to take out a second mortgage. A second mortgage has benefits if done for the right reasons and knowing whether it is a good choice for your situation is something our Grimsby mortgage broker team can help you with. We’ll go over everything that you need to know about second mortgages today.
What is a Second Mortgage?
A second mortgage is a mortgage taken out in addition to your existing first mortgage.. It allows you to tap into the available equity in your home and use it as collateral, without having to refinance your first mortgage. Like your first mortgage, a second mortgage is secured through a lien on the home. It runs in conjunction with your first mortgage by definition if you default on your mortgage the First mortgage holder takes priority for payment over the second mortgage holder. This makes a second mortgage more of a risk to the lender, which equates to having higher interest rates than your original first mortgage. The amount that you can borrow on a second loan is typically up to 80% of your home’s appraisal value, minus the first mortgage’s balance. You will now have two separate mortgages, often with two separate lenders with two separate payments.
The most common reason for doing a second mortgage is when you have an existing closed term mortgage and it is not maturing in the near future. The penalty incurred for breaking the existing term of you mortgage can be prohibitively expensive in many cases and where the option of a second mortgage really shines.
Reasons for Taking out a Second Mortgage
Homeowners tend to take out a second mortgage for the following reasons:
- To make home improvements
- Covering the cost of medical bills
- Consolidating debt to lower overall payments and interest cost
- Paying for your child’s college education
- Down payment to help purchase an investment property
Taking out a second mortgage to pay for luxuries, such as taking a vacation or purchasing a new car, is not advisable as it won’t add value to your property or its power to earn money.
Types of Second Mortgages
There are two types of second mortgage loans that you can get; a home equity fixed mortgage and a HELOC (home equity line of credit)
Second mortgages can either be with an institutional lender like a bank or credit union or with a private lender.
Home Equity Fixed Mortgage
With the home equity fixed mortgage option, you are given a one-time lump payment. You will repay that amount over a designated time frame, much like your original mortgage . You get a fixed rate of interest with this option, which is generally higher than your original loan.
The HELOC option is a line of credit that is secured against your home so it is re-advanceable, or re-usable and has a variable-rate of interest. Your payments are typically as little as interest only which gives you flexibility in repayment and you are only charged interest on the amount that you actually use.
Benefits of a Second Mortgage
- While the interest rates on a second mortgage can be higher than your first mortgage, they are usually lower than the rates you would get on a credit card or personal loan.
- Once your first mortgage is up for renewal you can look at combining the first and second mortgages in to a new first mortgage to save even more money.
A second mortgage can be helpful for the right situations. However, you need to be strict with your budget and not use the money from the loan to create more debt, like running up a credit card after you have paid it down with debt consolidation.
If you want to see if a second mortgage is right for you, give our Grimsby mortgage broker team a call today!