How is a Second Mortgage Different from a HELOC?

Owning a home means having the benefit of having home equity that you can tap into should the need arise. In the event of a huge financial expense that you can’t cover with just your savings, you can tap into your home equity. Examples of these high-ticket expenses are an extensive car repair, some expensive medical procedures that are not covered by insurance, home improvement and home renovation, or paying for higher education. In Canada, some of the most popular ways that homeowners use to tap into their home equity are second mortgages and HELOCs. So, how does a HELOC differ from a second mortgage and which one may be better for you?

Let’s Understand Home Equity

Home equity is your home’s current value minus any debt you have on it or remaining mortgage you still owe from your lender. This means that if your home is valued at $1million and you still owe $400,000, your home equity is at $600,000 which is 60% of your home’ value. Having home equity that is above 20% of the home’s value typically qualifies for both a second mortgage and a HELOC. Most lenders will also allow you to tap up to about 80% of that equity. For $600,000, that means you can access as much as $480,000.

What is a Second Mortgage?

A second mortgage is a home equity loan that is taken on top of having a primary mortgage. It comes as second in priority in terms of payment if you ever default and so carries more risk for non-payment. This is why second mortgages charge a higher interest than a primary mortgage. Second mortgages are dispersed as a lump sum and repaid in installments with a set sum according to terms until the entire debt and interest are paid in full.

What Is A HELOC?

A HELOC, or a home equity line of credit, involves the use of home equity as collateral for the loan but the loaned amount is made available as a revolving credit, unlike a second mortgage. With a HELOC, the homeowner is given access to funds that they can use and reuse as needed, much like having a credit card with a really high credit limit. The homeowner can take out as much as needed or even just a little amount at a time as long as the credit limit isn’t exceeded. The monthly payments are typically just based on the amount that is used up and interest is only charged for the same. With a HELOC, you can also reuse the funds after you’ve paid them back as long as the HELOC is still active. This is the most flexible option when it comes to borrowing against your home equity although may not work well for those with shopping addiction or uncontrollable spending.

How is a Second Mortgage Different from a HELOC?

Both second mortgages and HELOCs are extremely helpful for homeowners who need access to large sums of cash. Both have risks and pros that should be weighed out prior to deciding which one to get. Note that with both home loans, you will risk losing your home if you fail to honor the terms or make payments. It is best to speak to a mortgage professional to get an in-depth insight on how they differ and what may work better for you. If you’re planning to get a HELOC or apply for a second mortgage in Canada, do not hesitate to contact us.

 

Is It Worth it to Refinance Mortgage for Debt Consolidation?

Debt consolidation has many benefits, one of which is avoiding paying huge interest rates. With debt consolidation, paying debt is made much easier because instead of having to remember paying a few bills each month, you’ll only have to remember paying one. With these said, is it worth it to refinance mortgage for you to consolidate debt?

Getting Out of Debt

Many Canadians are weighed down by debt. Almost everyone who isn’t from a privileged background has car payment loans, credit card debts, student loans, and many other kinds of debts. It is easy to forget one or to get buried in paying just the interest in an effort to stay afloat. The problem is, handling multiple high-interest loans is tricky and if your plan is to just keep paying the interest, the loan will still get larger over the course of a year. Debt consolidation is the way to go.

For a lot of people, debt consolidation means taking out another loan. Most debt consolidations loans still come with high interest although a bit lower than say, credit card interest. Homeowners have a chance to save up on interest by applying for secured home loans such as a home equity line of credit (a HELOC) or going for a mortgage refinance for debt consolidation.

How Does Debt Consolidation Work?

So, a quick backgrounder. Debt consolidation is a way of combining multiple high-interest loans into a single loan that should be easier to pay for the debtor. The debt consolidation loan is taken to pay all remaining balances on multiple loans, effectively closing the other debts.

The main advantages of debt consolidation are that the borrower gets to choose a single loan with a lower interest than having to deal with multiple debts and bills, and, saving a lot of time and money in the process if properly planned out and executed. In other words, debt consolidation is a good way to pay debt for individuals who have a reliable and steady income and want to make their monthly debt payments more manageable and affordable.

Is It Worth It to Refinance Mortgage for Debt Consolidation?

Refinancing mortgage for debt consolidation is a way to get a lower interest payment plan. Most credit card debts charge 15-30% interest per month, but a mortgage usually just charge around 5%. Even considering all the fees the process of getting a mortgage refinance will entail, it is still possible to save thousands of dollars this way. Note that a debt consolidation refinance typically involves resetting an existing mortgage at a lower rate at the present time. This frees up some equity or the homeowner can pull out some equity to pay other debts. Closing costs will usually be at around 1-5% of the total loan but this amount is still low if a debtor can end up saving between 10-20% in interest per month.

Is it worth it to refinance mortgage for debt consolidation? The short answer is YES! If you want a more detailed response or interested to know how this applies to your specific situation, do not hesitate to contact us. At Mortgage Central Canada, we’d be happy to assess how debt consolidation can help get you out of debt.

 

8 Common Questions About A Second Mortgage

It is nearly impossible to have never heard of a second mortgage these days. Perhaps you’ve heard enough to start wondering why more people are getting a second mortgage or getting curious to know how getting a second mortgage may benefit you. We’ve compiled the answers to the most frequently asked questions regarding second mortgages here.

Are There Types of Second Mortgages?

There are several types. The most common ones are HELOCs and home equity loans. A second mortgage that is given as a lump sum is categorized under general home equity loan while one that is given as a revolving line of credit is called a HELOC.

What Collateral is Used?

The value that you own in your home, or your home equity, is the collateral used in a second mortgage. This means that not paying can result to foreclosure so you better be sure to read the terms before getting one.

What Are the Common Uses for a Second Mortgage?

Debt consolidation of high-interest debts and paying for home renovation are the most common reasons cited by those who apply for a second mortgage.

Are Interest-Only Payments Possible?

Yes, paying for just the interest on a monthly basis is possible for some types of second mortgages. This is a useful feature to look for when you’re planning to pay for the loan after getting an expected huge windfall or after you’ve sold the home.

How Can You Use Funds from a Second Mortgage?

Once approved for a second mortgage, you are free to use the funds however way you want. You can use it to invest in a business, invest on the home by paying for renovations, pay for expensive tuition fee, finance a lavish wedding or grand vacation, consolidate debt, and more.

Is There a Limit to the Amount That Can Be Borrowed?

Generally speaking, you may borrow up to 80% of the value of the home equity that you’ve built up. This means that if you have $100,000 home equity, you can access as much as $80,000 in the form of a second mortgage.

Are There Fees to Pay?

Besides the interest, you’re expected to pay certain fees depending on which of the types of second mortgages you’ve applied for. This is best discussed with a mortgage professional so you can have a better grasp of what fees you can expect and how much.

Are There Differences in Interest Rates?

The different types of second mortgages come with different interest rates. The biggest factor affecting this is the risk that the lender is taking by lending money to you. There are also instances that the same types of second mortgages will have varying interest depending on the terms set by the lender. For this reason, make sure to compare interest rates before finalizing your second mortgage application.

Do you have more questions about getting a second mortgage? Feel free to contact us so that we can address your queries. Our mortgage professionals will be happy to respond to additional questions you may have about applying for a second mortgage.