Is a Second Mortgage is right for you?
The thought of taking out a second mortgage might sound daunting, but it doesn’t have to be. You are taking on an extra monthly payment but, under the right conditions, a second mortgage could save you money. Here are some things you should know about second mortgages before you apply for one.
Reasons for Taking Out a Second Mortgage
Most Canadians take out second mortgages to help them consolidate debt. If you are overwhelmed by car loans, credit card debt or other high-interest debts, a second mortgage can help you make it more manageable.
Instead of holding numerous high-interest debt payments, you can have one low monthly payment with a lower interest rate, which translates into a lot of savings.
More and more Canadians are taking out a second mortgage to pay for things like home renovations or their children’s tuition. Second mortgages are ideal for tapping into the equity you have built in your home while you are in the middle of your mortgage term.
Even though you already have a mortgage, there is no guarantee that you will be able to secure a second one with the big banks. To get approved for a second mortgage, traditional lenders look at income, equity, credit score and property value.
The more equity you have in your property, the better your chances are of qualifying for a second mortgage. Banks and other financial institutions will want to ensure you make enough to afford the payments on a second mortgage. If you are an entrepreneur or self-employed with unreliable income, traditional lenders may not be able to verify you earn enough. Having a high credit score also means getting a lower interest rate on your payments.
Even if you do well on those factors, the big banks might still not want to approve a second loan as they do not like the property they are lending against. If for some reason, the bank forecloses, they need to secure their investment. If they do not think they can sell it quickly, they will turn you down for a second mortgage.
Selling a Home with a Second Mortgage
You can sell your home if you have a second mortgage on it. The money from the sale of the property goes to pay off the primary mortgage first and then the second mortgage, and you get anything that is left over.
The only time a homeowner with a second mortgage could run into trouble when selling their property is if their home’s value has fallen. It is possible for the sale of the property to not produce enough cash to pay off the first and second mortgage.
If you are looking for a second mortgage and want to know what you can afford, it is essential to work with an experienced mortgage broker. They can find you a second mortgage that not only meets your financial needs but also suits your long-term lifestyle.
Canada’s big banks and other traditional lenders need to follow strict guidelines set out by the federal government. Private lenders are not subject to the same rules, making them much more flexible and able to find better options for homeowners.