If you’re a homeowner, the thought of getting a second mortgage may have crossed your mind from time to time; more so that when used wisely, second mortgages can help you buy a new property, consolidate old loans, or even start a new business. There is no doubt that a second mortgage can be great for you, but it should also be noted that any type of mortgage means a new financial obligation.
How do you make sure that what you’ll be doing is a smart move and not a risky move that can hurt you in the long run?
Below are the risky and common mistakes people make when taking a second mortgage. Read up and avoid them as much as possible!
Not Watching Out for Balloon Payments
Using balloon payments is a trick used by some lenders to entice you into taking a second mortgage. The payment terms often start with small payments that increase over time and can put you in trouble later when you may not be able to afford the later stages of your mortgage’s payment. Failing to pay often results in huge penalties that can wreak havoc on your finances. To prevent this from happening, always make sure that you look over all the details of the payment plan before taking on a second mortgage.
Committing to a Mortgage with Huge Default Penalties
Defaulting on payments is always a risk when you take on two mortgages at the same time, so it is essential that you should be ready for consequences in the event that you end up missing out on payment later. If your second mortgage has a huge penalty, a one-time default might be something that you may be unable to recover from. Be sure to avoid this by negotiating a mortgage with little to no default penalty. This way, you’ll be reducing your risks when taking a second mortgage.
Forgetting to Fix Your Credit Score
A bad credit score can mean having to pay higher rates for your second mortgage. You can avoid this by double-checking your credit record for errors that can be corrected to your advantage. In doing this, your loan’s terms would be much more favourable for you.
Not Evaluating Your Need for Mortgage Insurance
Second mortgages typically come in a package along with many types of insurance. It is often the case that you have no need for these insurance add-ons and that having them would just be a waste of money. If a certain type of insurance isn’t important for you or you don’t think it would benefit you, it might be best to negotiate that it be taken out of your package to make the loan easier to pay.
Remember, a second mortgage is a good thing when you use it wisely. The smart use of a second mortgage starts with paying attention to all details right from your second mortgage application to its approval to ensure that your financial circumstances can handle the extra responsibility. If you have further questions about second mortgages, don’t hesitate to contact your Toronto mortgage experts at Homebase Mortgages!