What to Know About Getting a Second Mortgage in Edmonton
There are many reasons why you may need to borrow a large amount of money.
Perhaps you’re going back to school or want to start tackling your accumulating debts.
While there are multiple loan options available through a variety of lenders, have you ever considered using your home’s equity to finance your needs?
By tapping into your home’s equity, you can use a second mortgage to handle your expenses.
Keeping reading to learn what a second mortgage is, how it works and why you should consider this borrowing option:
What is a Second Mortgage?
A second mortgage is a loan that allows you to use your home as collateral when borrowing more money.
It taps into the equity of your home, which is calculated by taking the value of your home and deducting any loan balances.
It’s considered a mortgage because, should your home go into foreclosure, your second mortgage would receive any remaining funds after your first mortgage is paid.
There are two main types of second mortgages: a home equity loan and a home equity line of credit.
Depending on the type of loan and preferences, you may be able to opt for a fixed interest rate or a variable-interest-rate.
While variable interest rates create a potential to have a reduced interest rate during the repayment term, fixed interest rates make it easier to plan your payments and your budgets.
Here’s a closer look at the types of second mortgages:
Home Equity Loan
When you take out a home equity loan, or a lump sum loan, you borrow a determined amount of money and pay it back over a period of time.
You can use the money for whatever you wish and often don’t have to explain what you plan on spending the money on, depending on the type of home equity loan.
For example, some home equity loans are designed to only be used for home improvements. In that case, a budget typically needs to be submitted with the application.
Once you’ve received your home equity loan, you begin making repayments right away.
Home Equity Line of Credit
Alternatively, a home equity line of credit (or HELOC) is a type of home equity loan that is set up more like a credit card or regular line of credit.
Instead of a lump sum of money, you set up a line of credit that you can draw from at any time.
HELOC second mortgages are set up in two phases. First, you have the draw period in which you can borrow against the line of credit and repayment phase in which the loan but be repaid with interest.
During the draw period, you can continually borrow from and repay the line of credit.
HELOC loans start out as variable rate loans during the draw phase but can be switched to fixed-rate interest while repaying.
How to Qualify
In order to qualify for a second mortgage, you will require the following:
- Equity. The more equity you have the higher your chances of being approved for a second mortgage.
- Income. You will need to verify that you have a dependable source of income.
- Credit score. Second mortgages are loans, so lenders will look at your credit score. The higher your score, the lower your interest rates will be.
- Property. Lenders will seek collateral to secure their investment.
The bigger the loan payment, the higher the risk for lenders to hand over the money. They will want to see that you are able to make payments and, if not, that they will be able to get their money back.
Reasons to Get a Second Mortgage
Pay Off Your Debts
Second mortgages can be a great way to handle your debt since they typically offer interest rates far below those of credit cards and other types of loans.
So if you have a large amount of debt spread across multiple sources and accounts, a second mortgage can help you consolidate your debts and pay them off quicker.
Cover Revolving Expenses
If you’re covering financial responsibilities such as a home repair bill or tuition on a monthly basis, a home equity line of credit can easily give you access to the funds you need.
Because you can continually use the line of credit while making payments, the money will be available to you to cover revolving expenses.
Cash-Out Refinance Alternative
Cash-out refinances do have lower interest rates than second mortgages but these can be more difficult to secure since you are seeking to replace your primary loan with a new one.
If your lender rejects your application for refinancing, you may still have a good chance of getting a second mortgage.
The Pros and Cons of Getting a Second Mortgage
Getting a second mortgage may seem like the answer to your financial woes, but it’s important to consider all aspects of this type of loan before signing on the dotted line.
Here are some pros and cons of getting a second mortgage you should take into consideration:
The Pros of a Second Mortgage
- Depending on the lender, you can borrow up to 90% of your home’s equity, giving you the opportunity to borrow more money with a second mortgage than with other types of loans.
- Second mortgages have lower rates than credit cards because they are considered a secure debt. Because they require your home as collateral, they are less risky for lenders than credit cards.
- There are no laws that dictate how you can use the money, so there are no limits on how you spend the funds.
The Cons of a Second Mortgage
- Even though second mortgages have lower interest rates than credit cards, they do have higher rates than refinancing.
- Taking out a second mortgage commits you to two monthly mortgage payments per month. This can put a strain on your budget.
Are You Thinking About a Second Mortgage?
Caplink has the ability to accommodate your second mortgage financing requirements.
In order to determine if this is the right step for you, don’t hesitate to contact us today!
Our dedicated team is available to help with all of your financial needs.