Simply put, second mortgages are loans that you as a property owner can take out on an already mortgaged property. Now, if you are reading this post, it can be safe to assume that you know what home equity is and how it works. However, for new readers, when you purchase your home on mortgage, you will have no equity in the property, but as you slowly start paying off your mortgage, you will get back your equity on our property and you can use that equity as collateral for loans. And that is how you can apply for a second mortgage.
Different types of second mortgagesIf you are already paying for a primary mortgage and have good credit and additionally have built over 20% equity in your home, you may be eligible to get a second mortgage in the form of a Home Equity Revolving Line of Credit. HELOC loans allow you to borrow money from a revolving line of credit up to a specified limit. There’s also the option for a home equity loan where you will get a lump sum amount of cash that you can pay back similar to your first mortgage. This type of loan is accessible to Canadians with low credit scores or less equity in their property. At this point, you should have a clear idea that both of these loans are secured against your home equity. As a result, second mortgages can be used to free up the equity in a property for cash flow purposes.
A few reasons why one can choose a second mortgage
- Debt consolidation: You can use a second mortgage to consolidate your debts into a single payment. It can be very useful to pay off higher debts such as student loans and credit card bills. You will be able to group together these debts and clear them off at a lower interest rate.
- Home renovation: The funds that you receive from a second mortgage can be used for home improvement projects as well. Renovating your home can increase its market value and if you want to sell your property in the near future, you can expect a profitable return on investment. Also, you can choose to use the funds for a major purchase such as a car, or invest it in businesses.
- Buying a second property: Many choose to use a second mortgage as a down payment for a second property. If you’re thinking the same then you should know that a down payment of at least 20% is required for a second mortgage. The market price of a second home will almost be the same as your first property and this will be including the cost of valuation, administrative charges and as well as the legal fees.