Owning your own home is not easy as you think. There are so many things to attend to like completion of various government permits, payment of initial down payment, securing property insurance, etc., and contract(s) to sign like mortgage loan, contractor’s agreement, and miscellaneous clearances, to name a few.
If this is not enough, you also have to contend with credit score, credit investigation, and lender approval. The third one – lender approval – is what you must give priority to because this determines whether or not you will receive your loanable amount.
Once you succeed in getting approved for a mortgage loan, you can now proceed in either purchasing a house or building a new one. In some cases, a number of home owners will eventually resort to having a second mortgage to fund their initial mortgage.
How does this work and will it benefit the home owners in the long run?
In this blog, we will talk about second mortgage and how you can apply for one.
Dive in when you are ready…
Second Mortgage Defined
A second mortgage – also referred to as a second trust lien – is a loan type using your house as collateral. As such, a second mortgage commands a lower interest rate but with one caveat: this will call for additional service charges plus terminating costs that you will have to deal with.
Moreover, this type of loan takes on “second priority” in case you default on your initial mortgage amortization payments. If and when this happens, you will have to settle initially your first mortgage in full before payment to your second mortgage takes place.
You may find that a second mortgage appears to be more of a burden than a blessing but this is not always the case. Maybe if your credit score is wanting in positive remarks then getting a second mortgage could be a plan worth thinking about.
However, if you do not have any issues regarding your credit standing and you are not a risk to any lender then taking one can be good since you can consider this as a home buyer incentive.
Advantages and Disadvantages of Second Mortgage
If you are having plans in acquiring a second mortgage then it is best that you get informed of its advantages and disadvantages. The following are the benefits of getting one:
a. Loan amount – you can borrow up to a maximum of 85% of your property’s value depending on your lender. This value comprises all of your house loans including first and second mortgages, respectively.
b. Interest rates – second mortgage commands a lower rate of interest on your debt compared to conventional/traditional loans like credit cards.
c. Tax benefits – you can avail of a special deduction every time you pay interest on your second mortgage. We suggest seeking advice from a tax professional for more information regarding this perk.
The following, on the other hand, are the drawbacks of acquiring a second mortgage:
a. Risk of foreclosure – since your house is tendered as collateral, you face the risk of losing your property if you default on your monthly payments.
b. Loan costs – getting a second mortgage accompanies a number of costs and additional expenses that you need to settle prior to (and even after) the consummation of the contract.
c. Interest costs – while it is true that your second mortgage has lower interest rates, the interest costs incurred will be slightly higher compared to your first mortgage loan.
Regardless of the advantages and disadvantages presented, a second mortgage will continue to appeal to new home buyers like you most especially if you have plans on adding a complementary feature or in renovating a particular room/section inside your house.
Application of Second Mortgage
There are a number of uses for second mortgages and none of them are limited to any particular application like car loan, insurance loan, etc. These are as follows:
a. Home improvements – this refers to renovations. You have to sell your house at a higher price in order to settle your loan.
b. Avoiding PMI – private mortgage insurance can be avoided with a merger of loans and one method, in particular, is called the “piggyback strategy”. One example of this is the term “80/10/10” which indicates your initial mortgage’s loan-to-value ratio has to be at least 80% or lower in conjunction with your second mortgage.
c. Debt consolidation – you run the risk of losing your house when using a second mortgage as your means of paying off your other outstanding obligations. Since your property is on collateral, skipping on your monthly payments will automatically foreclose your home.
d. Education – this needs further scrutiny. There is nothing wrong in spending money on education but there are other much better options for this endeavor. We advise increasing your income opportunities instead of increasing your chances of foreclosing your property.
Do not rush yourself yet in applying for a second mortgage if your reason is any of the above. What you can do initially is conduct thorough research about other means of raising money to give you the
additional funds you badly need. You can also approach your nearest credit bureau and apply for a special government of Canada first time home buyers loan, if possible.
Additional Notes on Second Mortgage
You have to have the best sources to support your second mortgage bid should you decide to pursue this route. We can mention three of them and they are:
1. Local bank(s) or credit union(s)
2. Mortgage broker(s)
3. Online lender(s) – be wary of this one since there are many scammers on the internet.
Applying for a second mortgage is good for you. Although this may cause your property’s value to decrease, you have complete control over your finances since you will generally have only one lender to deal with.
Unlike other types of loans, your second mortgage can be placed with the same lender when you applied for your first mortgage.
Several uses can be derived from your second mortgage and all of them are unlimited in their scope. However, you stand the risk of property foreclosure if you become delinquent in skipping repayments on your loan.
We are your trusted mortgage solutions experts based in Canada founded by Faizal Garasia in 2019. We have access to more than 90 lenders including the largest banks, credit unions, trust firms, and financial institutions across Canada.
We help you understand and resolve issues regarding mortgages, finances, taxes, and other loan-related payments that impact your real estate plans.
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