TOP 5 Issues You Need to Know about Second Mortgages
Second mortgage loan is a popular lending product for many Canadian homeowners, who are facing financial difficulty. Getting a second mortgage is a serious step that must be carefully considered before it is undertaken. If you are thinking about applying for this type of loan, check our infographic to learn more about the main features of second mortgage loan and decide whether this lending option is the right choice for you.
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What you Should Know Before you Apply for a Second Mortgage
Second mortgages are ideally loans secured against a home that is already mortgaged. Basically, you’re getting another loan - in addition to a mortgage you are currently repaying - using your home as collateral. While it’s easy to be tempted into second mortgages, borrowers are advised to be careful not to get trapped in two loans especially if you’re already struggling to repay the first one.
That said, here are the top 5 issues about second mortgages that every intending borrower needs to know:
Second mortgages come with inflated interest rates
Assuming that a home owner has only repaid part of the first loan used to acquire the home, in the event of a default, the second mortgage can only be repaid after the first loan has been settled. This alone poses a big risk to the second lender and often results in slightly higher interest rates.
You're putting your home on the line
By taking a second mortgage against your home, you agree that if you fail to repay the loan as agreed, the lender can force you out of your home. In fact, the reason many lending institutions are so willing to hand out second mortgages is because they know that they can assume possession of the home if you default in repayment. For this reason, home owners are encouraged to consider their options wisely and only take a second mortgage when it is absolutely necessary.
Second loans are associated with numerous fees/charges
Most mortgages have fee/charges that have to be paid by home owners before or during application. Such charges include booking fees, legal fees - for the paper work, valuation fees, and many others. Moreover, most of the fees are often charged as percentages of the price of the mortgage. At the end of the day, the charges involved are too high and might make the whole process very expensive.
A financial adviser comes in handy. Using the same lender that gave the first loan might also reduce some of the charges.
Lenders look at several factors before a second mortgage application can be approved. The home owner should have a significant equity from the first loan - This can be achieved by renovating the house (changing the kitchen and finishing up the basement). Without a significant equity the second loan may not be granted.
Income verses debt/expenditure - Lenders also look at what percentage of the home owner’s income ends up as expenditure. Expenditures typically include insurance and other bills. Generally, the debt to income ratio should be low for one to qualify for a second mortgage.
Solid employment history - a borrower who has had several employers in a short span of time is usually a discouragement to a lender. Often, lenders prefer borrowers who have worked with the same employer for at least three years. Consequently, borrowers with one or two employers over several years are usually are more likely to get a second mortgage.
The purpose for the loan
As mentioned earlier the purpose of the mortgage should be productive. Two proposals that will attract a second mortgage effortlessly include;
Settling another debt - A debt that might as well be accumulating interests can be settled. That is wise. Renovating and finishing up the house - This increases the value of the property hence the home owner is increasing his equity. That’s why second mortgages are called home equity loans; they can help the owner gain some equity on the home from the first loan.
Do not take out a second mortgage to purchase a car. While buying a car is another thoughtful investment, you can always get cheaper auto loans from the many lenders spread all over.
What to consider when shopping for a second mortgage
Term - this is the period for paying back the loan. The shorter the term, the less interest you pay and the faster you gain home equity. Longer periods may mean less payment every month but at the end of it all more money is spent.
Credit score - The amount you can be given depends largely on your income and credit score. People with a bad credit history need to get it right first before considering a second mortgage loan. Rates vs. closing costs - A loan can have a lower interest rate but higher closing costs. It will end up being more expensive. A home owner should look at the upfront costs as well as the rates/annual percentage rate to make an informed decision on which loan to pick.
Shop around - Compare the different rates offered by different lending institutions. Getting help from a financial adviser on the different home equity loans can help you find the best rates available.