What is a Second Mortgage and Why Do Homeowners Apply for Them?
Monday May 06th, 2019
You may have heard of the term “second mortgage,” but have never given the topic much thought. Like other types of loans, consumers take out second mortgages to cover big ticket purchases or large expenses, such as home repairs, post-secondary education tuition costs or debt consolidation.
As the name suggests, a second mortgage is a secondary loan that you take out on your home. You can borrow up to 80 percent of the appraised value, minus the balance on your first mortgage. The loan is then secured with your home equity, as long as you have at least 20 percent equity built up.
While you chip away at your second mortgage, you also need to continue paying off your first mortgage. If you can’t make your payments and your loan goes into default, you risk losing your house. If that happens, your home will be sold to pay off both your first and second mortgages with your primary mortgage lender being paid first.
Interest rates, whether fixed or variable, are also something to consider when applying for a second mortgage since they are usually higher than first mortgages due to increased risks for lenders. You might have to pay administrative fees as well, such as appraisal, title search, title insurance and legal fees. Access to money is usually made with one lump sum deposited to your bank account.
Second mortgages can provide responsible homeowners with the necessary funds to finance home improvements that add to their property value. But, like all loans, if you plan to take on added debt, you must be prepared to pay it back. Before getting approved for a second mortgage, make sure you research your options by speaking with a qualified mortgage broker. If you are intending to use the funds to complete renovations to your home, consult with a realtor to find out your home’s current value, to discuss your desired upgrades, and how they can deliver the best return on investment.
For more information, please contact me, Deborah Clerk, Sales Representative at Keller Williams Realty, Brokerage, in Mississauga, Ontario, for details.