If you have considered getting a loan at any point since you purchased your home, the idea of obtaining a second mortgage has likely come up. But is a second mortgage right for you? Before you can say yes or no to this question, you have to take a look at the facts:
What is a second mortgage?
Before you even consider whether or not taking out a second mortgage is right for you, you need to understand exactly what one is. Much like a traditional mortgage, a second mortgage is a loan taken out against the value of the house. This, however, is where the similarities between a first and second mortgage end.
Unlike a first mortgage, the lender won’t furnish a loan equal to the value of the house, or what you paid for it (assuming what you paid was market value). Instead, second mortgages are substantially lower. This isn’t to say that a second mortgage is a small loan (they are often measured in the tens of thousands — and sometimes even hundreds of thousands — of dollars), but you shouldn’t expect it to match up with the dollar amount of your original home loan.
Also, although a second mortgage is a secured loan, it comes second to the first mortgage. This means that if you were to default on your home loans, the holder of the second mortgage could not collect a dime until the first mortgage holder has found a way to recuperate their losses. As such, if a primary mortgage holder takes a loss after attempting to recuperate money from a default, the second mortgage holder gets nothing.
Pros and cons of a second mortgage
Now that you know what a second mortgage is, let’s take a look at its benefits and drawbacks to help determine if taking one out would be the right decision for you.
Advantages to taking out a second mortgage
- Allows you to avoid refinancing your current home loan
A refinancing offer can seem attractive at first, but it can add decades to the term of your current mortgage. A second mortgage provides you with a viable way to avoid this.
- Based on current home equity
If you have added a lot of value to your home through improvements, then its assessed value will be a lot higher than it was when you bought it. A second mortgage allows you to take advantage of this, because it will be based on the home’s current value.
Disadvantages to taking out a second mortgage
- Higher interest rates
Due to the fact that a second mortgage is less guaranteed than a primary mortgage, the interest rates are usually slightly higher than a regular mortgage.
- Same risks as a regular mortgage
Although a second mortgage is inherently secondary to a primary one, your home can still be foreclosed on if you default on the loan.
- Limited loan amount
As we mentioned earlier, a second mortgage will be for less than what your home is worth, so don’t expect to get a $100,000 second mortgage for a home that is worth the same amount.
Is a second mortgage right for me?
A second mortgage can be a major financial boon. If you have decided that taking out a second mortgage is right for your, or you just need some more information to help you make the right decision, contact Fast Access Finance. Our team is ready and willing to provide you with professional information. We can be reached via phone at 416.367.9191 or via our website at www.fastaccess.ca