Perhaps you’re wondering whether now is the right time to get a second mortgage. After all, getting a second mortgage is quite common these days and it doesn’t seem to be a very complicated process. Is it indeed true that it is easy to get a second mortgage?
Second Mortgage Requirements
Just like any other type of loans, a second mortgage is a home loan that comes with its own set of requirements that can vary from one lender to another. For example, applying for a personal loan will typically have high consideration for source of income and ability to pay whereas, for a second mortgage, the primary focus is the value of the collateral for the loan. Second mortgage providers then have their minimum required home equity before anyone can apply for a second mortgage. Generally speaking, second mortgage providers are more concerned about the value of the collateral for the loan because that is what they can have in the event of a default or nonpayment (because a second mortgage is a secured loan). In contrast, providers of unsecured loans like credit card loans and some personal loans are more concerned about a borrower’s credit score and source of income because they face a higher risk of not getting paid back.
People apply for a second mortgage for a variety of reasons. The most common are for:
- Debt consolidation
- Paying for a big expense such as medical costs or tuition for school
- Funding for an investment
- Paying for home repair or home renovation
If you need a large sum of money and want to tap into your home equity without selling your home, one way that you can do that is to apply for a second mortgage.
Is a Second Mortgage Expensive?
Just like other loans, a second mortgage comes with fees and interest. You can expect to pay about 5-15% of your loan in fees and interest. That may seem like a lot at first glance but note that other loans charge as much as 30-40% on interest alone. Lenders need to charge interest at above the prime rate because second mortgages come only second in priority compared to a primary mortgage. It carries more risk for the lender and lenders have to account for that by paying for insurance and taking measures to protect themselves.
How to Pay for A Second Mortgage
Second mortgages typical follow an interest-only payment scheme for a set period. After that period, the loan can be reevaluated if a renewal is desired. If the borrower does not want to renew, then he or she simply has to follow the payment terms that were laid out when the second mortgage got approved. This is usually a 1-year term with details discussed with the borrower before funds were released.
Are you worried about the challenges you might encounter should you decide to apply for a second mortgage? We can help. Contact us and we’ll be happy to discuss with you the basics of a second mortgage as well as other home equity loans in Canada plus how they might be able to help you.