Many homeowners who are looking to borrow money find themselves turning to second mortgages. Perhaps you have even considered this yourself or perhaps someone has recommended this to you. But what exactly is a second mortgage and what makes it such a powerful tool for borrowing?
Simply put, a second mortgage is a loan against your home equity. Unlike refinancing, getting a second mortgage does not require you to break your first mortgage which means there is no financial penalty. Most lenders will allow you to borrow up to 80% of your home equity when you get a second mortgage – so the amount that you can borrow is often substantial.
Let’s say that you have a home that is worth $500,000 and you still have $100,000 owing on your mortgage. That means you have $400,000 in home equity. Now if a lender allows you to borrow up to 80% with a second mortgage, that means you could borrow as much as $320,000.
In terms of repayment, a second mortgage works just like a first mortgage. You make regular monthly (or bi-weekly) payments with the required interest for the term of the second mortgage. At the end of that term, you can either pay off the balance or renew for another term.
Second mortgages vs. other types of loans
One of the biggest advantages of borrowing from your home equity is that interest rates are considerably lower than they are on other types of loans such as credit cards, personal lines of credit, or other unsecured loans.
Because your loan is guaranteed by your home, lenders consider this to be less risky, and are therefore prepared to offer better rates.
These loans can also be much easier to qualify for which is important if you don’t have stellar credit.
When compared to refinancing (which is another popular way to borrow from your home equity), a second mortgage will likely have a slightly higher interest rate. But since there is no financial penalty for breaking your mortgage, a second mortgage could still be the most cost-effective way to go.
In making the decision as to whether to get a second mortgage or a mortgage refinance, the most important factor in determining which is the better option, is your mortgage renewal date. The closer you are to your renewal date, the more refinancing makes sense. But if your renewal date is still quite some time away, getting a second mortgage is likely your best option. But don’t get too tied down in these details – your mortgage broker will run the appropriate calculations for you to determine which is the best option for you.
Reasons to get a second mortgage
A second mortgage can be a good borrowing strategy for anyone who is looking to borrow a large sum of money. Because interest rates are low on these types of loans, it can be easier to pay off a second mortgage than a large unsecured loan.
Large expenses such as home renovations, investing in a new business, or getting a down payment for another property are all popular reason for people who choose to get a second mortgage.
Another good reason to get a second mortgage is for debt consolidation. If you have a lot of high-interest consumer debt, paying it all off can feel impossible. And if you are paying multiple lenders, trying to remember all the different payments can be really stressful.
Getting a second mortgage in order to consolidate your debt can move all those payments into one easy to remember payment. And because you can save quite a bit on interest, you will be able to pay down the principal faster or be able to keep more money in your pocket each month – or possibly even both! By using a second mortgage to consolidate your debt, you may be able to get out of debt months – or even years – sooner.
What if I have bad credit?
As long as you have enough equity in your home, it is likely that you still will be able to get a second mortgage even if your credit isn’t perfect. Mortgage brokers work with a variety of different lenders and some of these lenders specialize in helping people with bad credit.
Even better as you pay off your second mortgage, it can actually help you to rebuild your credit score. This is particularly true if the reason you got the second mortgage was to consolidate your debt.
Are there any disadvantages to getting a second mortgage?
If you need to borrow a large sum of money, then getting a second mortgage can be a really good strategy. But since you are leveraging your home, it is very important to know that you will be able to handle the debt payments. Otherwise, you could end up in financially worse shape than you were before.
Contact us today
If you are considering getting a second mortgage, or if you would like to discuss this option with a broker to see if it is right for you, then give us a call today to set up an appointment.