A Second Mortgage, What It Is And How It Works?
What Is A Second Mortgage?
A second mortgage is when an additional loan, with a different mortgage lender, is taken on a property that is already mortgaged. When the mortgage holder makes payments on the second mortgage, they must also continue to make payments on the primary mortgage.
Why Are Interest Rates Higher On A Second Mortgage?
The lender for the second mortgage takes on more risk than the provider of the first mortgage because they would be in second position on the property’s title. For example, if a homeowner defaults on their payments and the property is then taken into possession, the lender of the original (first mortgage) would be paid out first. The lender of the second mortgage is at a higher risk of not being paid out in full, and thus, due to this additional risk, second mortgage rates are almost always higher than the rates of a principal mortgage.
Many Canadians Get A Second Mortgage For Reasons Such As:
- to consolidate high interest debts
- to pay for medical or unexpected emergencies
- to pay for a home renovation
Advantages and Disadvantages Of A Second Mortgage:
Advantages of a Second Mortgage
- You don’t have to discharge your current low rate first mortgage and suffer penalties and fees
- Since there are many providers, both institutional (banks and credit unions) and private (mortgage lenders/providers), it can be arranged with greater ease.
- Most second mortgages are interest only payments and 1-year terms.
- Up to 80% of your appraised home value can be used to arrange a second mortgage, minus the amount left to pay on the primary mortgage.
- Any homeowner with a primary mortgage and decent credit history can apply for a second mortgage.
Disadvantages of a Second Mortgage
- Higher interest rates for a second mortgage than a principal mortgage because the lender has to take on more risk.
- A second mortgage can sometimes lead to foreclosure when a homeowner defaults on their loans. The lender for the second mortgage can purchase the primary mortgage and then foreclose, which then leaves the homeowner losing their home to the second mortgage lender.
- Terms can last up to 30 years on a second mortgage but repayment can be required in as little as 1 year depending on the structure of the loan.
- Higher interest rates than primary mortgages, however rates are still often lower than high interest credit cards or unsecured lines of credit.
- There are 4 main areas that lenders will look at in order to qualify for a second mortgage: Equity, income, credit score and property.
Second Mortgage, how do you qualify?
Since second mortgages are risky for lenders, in order to qualify, lenders will look at the following:
- Equity – The more equity an applicant has, the higher the chance of qualifying for a second mortgage.
- Income – Lenders need to ensure that an applicant can make payments. Therefore, a dependable source of income increases the chance of qualifying for a second mortgage.
- Credit Score – An applicant’s credit score can determine the interest rate for the second mortgage. As a rule of thumb, the higher the credit score, the lower the interest rate.
- Property – Lenders need to secure the investment in the applicants’ property in the event that the applicant is unable to keep up with mortgage payments.
- If you are retired and are unable to qualify for a second mortgage due to reasons such as low credit score and lack of income, there is another option. A reverse mortgage can act as a viable second mortgage for retirees.
A Reverse Mortgage, Your Second Mortgage Option:
Are you a Canadian homeowner above 55 years of age? An effective home equity loan option you can use is a reverse mortgage. A reverse mortgage, just like a second mortgage, is a loan secured against the value of the home. It provides the homeowner with the ability to unlock the value of their home without having to move or sell. The biggest feature of a reverse mortgage over a second mortgage is that a reverse mortgage requires no regular payments until a homeowner moves, sells or no longer lives in the home.
Advantages of a Reverse Mortgage
- Retain the title of your home.
- No regular monthly payments required
- No repayment required until you move or sell your home, or the homeowner(s) passes away.
- You can get up to 55% of the appraised value of your home in tax-free cash.
Disadvantages of a Reverse Mortgage
- Because you are not required to make any monthly payments for the duration of the time you live in your home, the interest rates are slightly higher than a conventional mortgage.
- You must be 55 years of age or older to be eligible.
These are among the many options available to retirees who may need financial assistance. For more information on a CHIP reverse mortgage in Canada or to get a free information guide, contact HomEquity Bank at 1-866-522-2447 to see if a Canadian reverse mortgage is a good second mortgage option to fulfill your financial needs.