Many clients in Wasaga Beach and across Ontario are using second mortgages to consolidate high interest rate debts, renovate their homes or pay for unexpected expenses. Up to 95% “loan to value” second mortgages are available. A second mortgage does not replace your existing first mortgage.
It is a second position mortgage which is advantageous if you currently hold a favorably low rate first mortgage and do not want to discharge due to penalties, fees, etc. Second mortgages can also be arranged with greater ease due to the amount of lenders available both institutionally and privately.
Second mortgages are similar to, home equity lines of credit (HELOCs).
Call today for more information on a second mortgage in the Town of Wasaga Beach area:
(705) 717-5598 (416) 912-6200
Second Mortgage Rates
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Rates on a second mortgage usually start a few percentage points higher that a first mortgage. The rate will depend on various factors such as your credit, loan to value, and even the area the property is located in. It should be noted that even though second mortgage rates are higher, the funds are generally used to pay off debt with much higher interest rates. Second mortgages are also used to consolidate debt until a first mortgage comes up for renewal – then both are consolidated into a new first mortgage.
What is a Second Mortgage?
A second mortgage is a loan that uses your home as collateral – similar to a loan you might have used to purchase your home in Wasaga Beach.
The loan is known as a “second” mortgage because your purchase loan is often the first loan that is secured by a lien on your home.
Second mortgages tap into the equity in your home, which you might have built up with monthly payments or through market value increases in Wasaga Beach.
Home equity loans and home equity lines of credit (HELOCs) are common examples of second mortgages. Some second mortgages are “open-end” (meaning you can continue to take cash out up to the maximum credit amount and, as you pay down the balance, can draw again up to the same limit) and other second mortgage loans are “closed-end” (in which you receive the entire loan amount upfront and cannot redraw after that).
The term “second” means that if you can no longer pay your mortgages and your home is sold to pay off the debts, this loan is paid off second. If there is not enough equity to pay off both loans completely, your second mortgage loan lender may not get the full amount it is owed. As a result, second mortgage loans often carry higher interest rates than first mortgage loans.
By taking out a second mortgage, you are adding to your overall debt burden. Anytime you add on to your overall debt burden, you make yourself more vulnerable in case you then experience financial difficulties that affect your ability to repay your debts. It is important to know that a major risk with home equity loans or home equity lines of credit is that if you cannot repay a home equity loan or home equity line of credit, you could potentially lose your home because you are using the equity in your home as collateral.
How does a second mortgage work?
Loans can come in several different forms.
Lump sum: a standard second mortgage is a one-time loan that provides a lump sum of money you can use for whatever you want. With that type of loan, you’ll repay the loan gradually over time, often with fixed monthly payments. With each payment, you pay a portion of the interest costs and a portion of your loan balance.
Line of credit: it’s also possible to borrow using a line of credit, or a pool of money that you can draw from. With that type of loan, you don’t ever have to take any money – but you have the option to do so if you want to. You’ll get a maximum borrowing limit, and you can continue borrowing (multiple times) until you reach that maximum limit.
Like a credit card, you can even repay and then borrow again.
Rate choices: depending on the type of loan you use (and your preferences), your loan might come with a fixed interest rate that helps you plan your payments for years to come. Variable rate loans are also available and are the norm for lines of credit.
What is the difference between a home equity line of credit and a second mortgage?
A home equity loan is a loan that is secured by your home. If you repay the loan as agreed, your lender will discharge the mortgage. If you do not repay the loan as agreed, your lender can foreclose on your home to satisfy the debt. Generally, the amount that you can borrow is limited to 80 percent of the equity in your home, although in some situations this amount may be higher. The actual amount of the loan will also depend on your income, credit history, and the market value of your home. The two distinct types of home equity loans are the home equity line of credit (HELOC) and the closed-end home equity loan, often referred to as a second mortgage.
A HELOC, which is the more popular loan, is structured as a revolving line of credit. You can borrow as much as you need, whenever you need it, by writing a check as long as your total borrowing does not exceed your credit limit. Because it is a line of credit, you make payments only on the amount you have actually borrowed, not the full amount available. Borrowers will usually set up a HELOC so that it is available for unexpected expenses. It may also be beneficial to use your home equity loan to purchase a car or pay your child’s college tuition, since the interest is generally tax deductible.
A closed-end home equity loan, or second mortgage, is a loan for a fixed amount of money that must be repaid over a fixed term, just like your original mortgage. Borrowers typically use closed-end home equity loans to pay for a single large expense, such as a major home improvement or college tuition.
Advantages of Second Mortgages
Loan amount: second mortgages allow you to borrow a large amount. Because the loan is secured against your home (which is generally worth a lot of money), you have access to more than you could get without using your home as collateral. How much can you borrow? It depends on your lender, but you might expect to borrow (counting all of your loans – first and second mortgages) up to 95% of your home’s value.
Interest rates: second mortgages often have lower interest rates than other types of debt. Again, securing the loan with your home helps you because it reduces the risk for your lender. Unlike unsecured personal loans like credit cards, second mortgage interest rates are commonly in the single digits.
Tax benefits: in some cases, you’ll get a deduction for interest paid on a second mortgage. There are numerous technicalities to be aware of, so ask your tax preparer before you start taking deductions. For more information, learn about the mortgage interest deduction.
Disadvantages of Second Mortgages
Of course, life is full of trade-offs. Be aware of the pitfalls of using a second mortgage. The costs and risks mean that these loans should be used wisely.
Risk of foreclosure: one of the biggest problems with a second mortgage is that you have to put your home on the line.
If you stop making payments, your lender will be able to take your home through foreclosure, which can cause serious problems for you and your family. For that reason, it rarely makes sense to use a second mortgage for “current consumption” costs such as entertainment and regular living expenses – it’s just not sustainable or worth the risk.
Cost: second mortgages, like your purchase loan, can be expensive. You’ll need to pay numerous costs for things like appraisals, origination fees, and legal fees to register the second mortgage on your home. Even if you’re promised a ‘no closing cost’ loan, you;re still paying – you just won’t see those costs transparently.
Interest costs: any time you borrow, you’re paying interest. Second mortgage rates are typically lower than credit card interest rates, but they’re often slightly higher than your first loan’s rate.
Second mortgage lenders take more risk than the lender who made your first loan. If you stop making payments, the second mortgage lender won’t get paid unless and until the first lender gets all of their money back.
Common Uses of Second Mortgages
Choose wisely how you use funds from your loan. It’s best to put that money towards something that will improve your net worth (or your home’s value) in the future – because you need to repay that loan.
- There are situations when you may cash out some home equity using a second mortgage:
- You may have accumulated a large amount of debt through auto loans, balances on high interest credit cards , credit lines and other bills (medical costs, kid’s tuition fees, etc.) and need to pay them off. This will help increase your monthly cash flow and reduce interest costs.
- You may wish to repay and eliminate judgments, consumer proposals or unsettled collections. Also, you may want to payoff for your car loan, purchase a vacation property or plan for a vacation. You can obtain the required cash by taking out a 2nd mortgage loan.
- There may be an opportunity for you to invest in stocks , mutual funds or business investments. You can then use a second loan to go for it. But check out if the rate of return on your investment is higher than the second mortgage rate. Only then it will turn out to be a profitable venture.
Tips for Getting a Second Mortgage
Get prepared for the process by getting money into the right places and getting your documents ready. This will make the process much easier and less stressful.
Beware of dangerous loan features. Most conventional loans do not have these problems, but it’s worth keeping an eye out for them:
- Balloon payments that you aren’t able to budget for
- Voluntary insurance that might duplicate coverage you already have (or give you coverage you don’t need)
- Prepayment penalties that prevent you from paying off your debt early
If you are looking for a second mortgage lender in Wasaga Beach, and the surrounding area, contact us today.