For the first time in their lives, many Canadians are considering using the equity they have in their homes for various purposes. This process can feel overwhelming with all of the procedures and jargon that are used during discussions, not to mention all the ever evolving regulations surrounding mortgage loans.
If you find that that it all feels like too much, Don’t feel bad about it, because even experienced homeowners and industry insiders sometimes struggle to understand it all.
One option homeowners often decide on when utilizing home equity is a second mortgage.
This is a mortgage that is normally used by a homeowner in need of money for several different reasons, such as:
- Working capital
- Home renovations
- Emergency repairs (car, home, etc)
- Consolidating debt
- Paying for education
- Paying for wedding expenses
And various other reasons that may require a considerable amount of money.
In this article, we will go over what a second mortgage is, and how you can use it.
1. A Second Mortgage Comes in Two Forms
Although there are many different forms of second mortgages, they normally come in two main types:
- Revolving HELOC (Home Equity Line of Credit)
- Closed Second Mortgage (lump sum, so you get all the funds at once)
These are offered by various lenders such as banks, mortgage brokers, or through private lenders.
The main difference between these two is made clear by the following:
A HELOC is a line of credit that is secured against the equity in your home. It is revolving which means once you use a portion and pay it off, you still have access to the funds should the need arise to use it again.
Although this type of mortgage loan has more flexibility, this method is often more difficult to get approved. A HELOC will also typically have a variable interest rate.
A Second Mortgage is instead paid out all at once in a lump sum. More often than not, it is a mortgage with an interest only payment structure.
2. Second Mortgages are Secured Loans
When a mortgage is secured, it means that the home is being used as collateral.
In the event that the homeowner is unable to pay back the loan, the lender may have the option to initiate Power of Sale or enact a lien against the property to ensure that the outstanding debt is paid..
3. The Two Most Common Uses are…
Debt Consolidation: A second mortgage for this purpose can be very helpful to someone who is looking to pay off all debts and combine them into one manageable payment. When this is done to pay off all unsecured debt. A persons credit score more often than not will increase, which allows for more favourable lending options down the road.
Home renovations/upgrades: Renovations can be a great way to turn your house
to a home. whether it’s your basement, roof or home appliances.
The costs can get very high very quickly. Whatever the reason, a second mortgage can help a you free up the funds to get the job done.
4. Faster turn around time
One of the greatest advantages that a second mortgage has over all other products is how quickly you can get access to the required funds. Once the appraisal report is completed. We are talking days instead of weeks. This feature can be quite valuable especially when time is of the essence.
5. There are Fees Involved
While a second mortgage can be a great option, it does come with a price.
There are several fees that have to be paid, which is why you should always consult a mortgage broker getting a second mortgage.
These fees can include:
- Brokerage Fees
- Appraisal fees
- Closing fees
- Legal fees
This can easily result in several thousands of dollars in fees, which is why it’s so important to find a mortgage broker that will explain the exact costs and not estimates before any contract is signed.
Always work with a broker that is reputable and has experience in the industry, so that they can help you make the right decision.
6. Bad Credit? There’s a Second Mortgage for That!
One of the great things about a second mortgage is that there’s still a possibility to get one even if you don’t have a great credit history.
Depending on the amount of equity in your home, and the repayment history of the current mortgage. A borrower could potentially find a lender that might approve your second mortgage without too much concern for your credit score.
For example, a private lender looks at your eligibility for a loan by examining your equity and payment history on your current mortgage.
For this reason, it might be easier getting a second mortgage than a standard loan, this of course depends if you’ve kept making payments on time and have good a lot of equity.
A great way to use a second mortgage is to clear debt, for example:
- Tax arrears
- High-Interest Consumer Debt
- Debt in Collections
- And several others
As you see, a second mortgage is a great tool to handle bad debt if used correctly and for getting cash when your credit history is not good.
7. Private Lenders are not as strict as banks
Because all banks that are regulated federally need to operate within specific laws and guidelines, a large portion of borrowers often get disqualified from getting access to the equity.
Every person’s situation is unique, which is why it’s so important to make sure your request is reviewed individually.
This ensures that you have the best possible chance of getting the loan at a reasonable rate.
More often your best option might be to choose a private lender.
The reason for this is because a private lender is a business, not a bank or financial institution that finances your loan. And will take a more common sense approach to every deal.
As we’ve seen, it’s very important to look at all available options when making a financial choice that is best for both you and your family.
The answer is not always clear, and so it often requires professional advice.
A good rule of thumb is to never make a big financial decision when you feel pressured into it or if someone rushes you.
However, since you’re reading about second mortgages, you most likely are in a difficult financial position and in need of some quick money.
That’s why it’s very important to choose the right broker that is trustworthy and has your best interests in mind.
Because there’s a tremendous amount of factors that are involved with second mortgages, it’s not recommended to try and do this on your own.
At Mortgage Brokers of Canada, you can be sure of our 30+ years of experience helping clients just like you with their second mortgages.
We’ve always got your back and guarantee the best possible service.
Book a completely FREE consultation with one of our professional advisors here:
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