Everything You Need to Know About Second Mortgage Loans
What Is a Second Mortgage Loan?
You would think that one mortgage is enough to finance your home. But sometimes, this is not the case. And that's why people end up taking out a second mortgage loan. But second mortgage loans can be risky. So, it's best to fully understand what you're getting yourself into before committing to a second mortgage.
A second mortgage loan is a type of loan that is taken out on top of an existing mortgage. It is a loan that you can use to pay down an existing mortgage loan or to finance other purchases.
The main benefit of a second mortgage loan is that it is a secured loan. In other words, it is collateralized by the property of the borrower. The collateral is held by the lender as protection for the loan. This means that if you were to default on your second mortgage loan, your lender could take possession and sale of the property, receive the money from the sale and pay off the loan.
What Are the Interest Rates of a Second Mortgage Loan?
In most cases, the interest rate on a second mortgage is higher than on a first mortgage. This is because a first mortgage is usually a low-risk loan. You are likely to have property equity, a steady source of income, and a good credit score, making you a low-risk borrower. You are likely to repay the loan.
Second mortgages are lower risk than first mortgages but not as low risk as the borrower would like them to be. So, the interest rate on a second mortgage loan is a bit higher.
A second mortgage loan typically has an interest rate that is one to two percent higher than the first mortgage loan. Of course, this all depends on your personal credit score, as well as the type of loan you are applying for. If you are applying for a second mortgage loan on a house that is worth less than 30 percent of its original value, the rate may be up to three percent higher than a first mortgage loan.
Should You Get a Second Mortgage?
It is highly recommended that you get a second mortgage loan only if you are in a true financial pinch. If you are thinking of getting a second mortgage loan, it's because you have maxed out your first mortgage. And this is because you are struggling to make your monthly mortgage payments.
A second mortgage is best used if you have a large expense looming that you can't pay for with your first mortgage. In this situation, a second mortgage can be a lifesaver, as it allows you to make the payments for the large expense.
However, if you are thinking of getting a second mortgage so that you can finally afford that second home theatre room you've always wanted, a second mortgage is not for you. Most lenders won't approve the loan if you are simply looking to get higher-end appliances for your home.
THE BOTTOM LINE
Second mortgage loans can be risky, but they can also be very helpful. You should only get a second mortgage loan if you are struggling financially and need the loan to make ends meet.
Do you want to learn more about mortgage financing in Canada? Level Up Mortgages supports homebuyers and homeowners in attaining success in their mortgage journey with mortgage strategy, digital mortgage education, and introductions to all the other experts you need to succeed in home buying and your personal finance. To assist homebuyers and homeowners in purchasing or refinancing new homes, we work with premier banks and best-rate mortgage lenders in British Columbia and Ontario. Get in touch with us today!