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.

 

Planning on Getting a Second Mortgage or Applying for a HELOC? Read This!

If you’re a homeowner, it may have crossed your mind to use your home equity to get a second mortgage or perhaps apply for a HELOC; but how possible is it for you to get one? Are you sure that you can get HELOC or second mortgage approval with the recent changes in interest rates and mortgage rules? Do you know that getting a HELOC is not the same as applying for a second mortgage because they are entirely different types of home equity loans? We’ll talk about what you have to know regarding HELOCs and second mortgages in this write-up.

Both Second Mortgages and HELOCs are Secured Loans

Your home equity serves as the loan security or collateral when you decide to go for a second mortgage or a HELOC. The difference is in how you can access the funds. With a second mortgage, you can get the funds as a lump sum while with a HELOC, you can access as little or as much as the whole predetermined amount for a set span of time. With this difference, payment for a HELOC usually fluctuates on a monthly basis while payment for a second mortgage is a fixed monthly rate.

Missing Payments Can Mean Losing Your Home

The terms of both second mortgages and HELOCs state that the lender has a right to your home equity if you fail to make payments. To access your equity, the lender will liquidate your home. With this in mind, you have to be extra careful before signing up for these loans or risk losing your home if you default.

The Most Common Reason for Both Remains to Be Home Improvement

Most people get a HELOC or a second mortgage to finance home improvement or home renovation. Lately, more people are using HELOCs for debt consolidation too.

HELOCs and Second Mortgages Need Financial Planning

Because missing payments on second mortgages and HELOCs can have serious effects on your finances and life, you have to at least have a general idea of your cash flow so that you’ll be able to manage payments and other expenses in the future. Know that just because second mortgages and HELOCs are easier to apply for than primary mortgages do not mean that repercussions for nonpayment are less severe.

Be Ready for Pitfalls

HELOCs and second mortgages come with pitfalls too. One wrong decision can mean financial ruin more so if you simply decide to get one without guidance from mortgage professionals. For instance, a lot of people have the wrong notion that they can max out their home equity and things should be fine but that is not the case. Note that the bigger the amount you take out from your home equity, the bigger the interest rate and consequences for nonpayment and delayed payment will be.

Are you ready to get a second mortgage or are you planning to apply for a HELOC? Contact us today so that you can get answers for your home equity loan questions straight from mortgage professionals!

Tips and Information About Getting A Second Mortgage

A second mortgage is a different thing from a first mortgage as well as refinancing of first mortgages. Unlike for those two, private loan investors and companies need to consider the equity built in the home prior to approving a second mortgage; with lesser consideration given to income source and credit score as well. This also holds true for banks and institutional lenders although compared to private lenders, they are still a lot stricter with regards to credit score and having regular employment.

Applying for a Second Mortgage

Most people apply for a second mortgage to pay off their existing debts in a process called debt consolidation. Some people apply for a second mortgage with the intent of using the money for a home renovation or paying for higher education. A small but significant portion applies for a second mortgage to use as an emergency fund. The beauty of a second mortgage is that lenders often do not ask or need to know what the loan is for as long as their requirements are met.

Cost of a Second Mortgage

Do you know that in Canada, homeowners can access as much as 80% to 90% of their home equity through a second mortgage? For homeowners who are in need of cash, that is a good amount of money that can change lives if used wisely more so that it comes at a cost of about 5% to 15% in fees and interest. Is that amount too much? Not really if you compare it to the interest and fees of personal loans and credit card loans. You’ll save upwards of half the fees and interest if you decide to use a second mortgage instead of other loans. Now, comparing to a primary mortgage, that money may seem like a lot but also note that lenders face higher risks of nonpayment and default for second mortgages. The fees are truly justified.

Paying for a Second Mortgage

Paying for a second mortgage is usually straightforward. You agree to a monthly payment that usually just covers the interest. There are prepayment options too and you can avail of that when discussed with your lender.

What happens after you’ve reached the term of your loan? Are you obligated to full right then and there? Most of the time, you’ll have the option to renew your loan for another year. If you do not wish to do so, then simply follow the payment terms laid out when you first got approved for your second mortgage.

Facts About Second Mortgages

Below is a summary of details that usually apply for a second mortgage:

  • You may use up to 90% of your home equity
  • Different lenders follow different procedures and have different requirements. It is possible to get approved by another lender even when turned down by a bank.
  • Most second mortgages offer 1-year terms and usually charge for the interest-only before the payment term.
  • Interest rates for second mortgages begin at the prime rate.

Do you want to apply for a second mortgage? Fill up this contact us form and we’ll get back to you as soon as possible. We’d be happy to address any questions you may have about getting a second mortgage.

 

Will a HELOC Prevent You from Getting a Second Mortgage?

It may be easy for a lot of homeowners to apply for a second mortgage but those who have an existing HELOC may have a bit of a challenge. A few months ago, the leading HELOC provider in Canada, Toronto-Dominion Bank changed their rules for those applying for a second mortgage. Part of their new changes is that they now require people with a HELOC who are applying for second mortgage and other financing methods to prove that they can pay. The proof that they want is not based on the actual balance rather it is based on a theoretical monthly limit. A lot of lenders are now implementing this change including the Royal Bank of Canada.

Industry experts think that the change discussed above is going to have a significant impact on both rental and second home markets as well as may affect those who want to borrow money using their home equity.

One Small Step Equals Huge Changes

With the above, getting a new loan or another second mortgage means that the borrower will be subjected to a stress test – a test that will determine what credit limit can work for you for a HELOC. The lender will add an assumed payment (that is based on the government’s benchmark) to your application and determine your capacity to pay from there. This means that when you decide to get a HELOC in 2019 onwards, banks will subject you under a stress test. This will not affect those who will be renewing their mortgage. This is only meant for those who have an existing HELOC and wishes to get another second mortgage.

What the Numbers Say

With the above changes, someone who has a HELOC of $200,000 need to prove that he or she has the capacity to pay $1,202 per month based on current rates. This will no doubt negatively affect those who are turning to a second mortgage for financial elbow room. The good news is that it looks like only major banks are going to implement the new policy for 2019, which means that other lenders may be more forgiving and easier to borrow from.

Is This a Sign of Bank Hypocrisy?

It is difficult to say but the fact is, the banking industry generates a lot of income from HELOCs to the point that borrowers are actually offered a HELOC without even applying if the bank deems them to be credit worthy. It seems to be an unfair system when the bank persuades you to get a HELOC and then proceeds to fence you in once you’ve signed up for it. The situation is as such that renewing a mortgage or even switching from one bank to another comes with a lot of challenges. Note that banks often push for the maximum HELOC amount when a borrower files an application, a practice that some industry insider deem shady because it serves to trap borrowers in debts that they don’t truly need.

Is There a Solution?

If you have an existing HELOC, applying for a second mortgage from private mortgage lenders and other institutions might be a better option than trying to borrow from banks. Contact us and let’s discuss what financial options may work for you.

 

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.

 

The Second Mortgage Checklist You Need to Read

Do you know that now is one of the best times to get a second mortgage in Canada despite concerns over the contrary? The risks are not worth sweating over if you take the time to understand what a second mortgage is and only decide after identifying the best type of second mortgage that may work for you.

Second Mortgage Primer

A home loan that you take which is secured by your home equity is the definition of a second mortgage. It is called as such because unlike the primary mortgage which gets first priority in the event of you defaulting payment, it only comes second.

A second mortgage can allow you to access a maximum of 80% to 90% of your home equity. The maximum limit is determined by the type of loan you’ll apply for as well as how much the lender will approve knowing that most people who get a second mortgage simply want to avoid the fees associated with refinancing and the fees incurred by breaking a current mortgage.

Why Apply for a Second Mortgage?

Most people cite debt consolidation, home renovation, or higher education when asked for a reason why they’re applying for a second mortgage. In a nutshell, a second mortgage gives a homeowner more elbow room to maneuver in when fixing his or her finances in the long run.

Types of Second Mortgages

There used to be a time when second mortgages were perceived as a desperate choice for financially desperate people. Thankfully, that misconception has been cleared up. More people understand now that second mortgages come in various forms that have their own set of advantages and disadvantages.

A HELOC is a great choice for someone who needs recurring access to a significant amount of money because it allows the homeowner to keep accessing the loan as long as parameters are met. As a form of revolving credit, a HELOC is a flexible loan product that gives homeowners the freedom to spend what they need whenever they need within the limits of the loan.

Those who need a lump sum may choose to get a home equity loan. This is especially helpful for those who need money for a huge renovation or debt consolidation.

What Are the Risks of Second Mortgages?

Second mortgages typically come with a higher risk for both lender and borrower as compared to a first mortgage. This is mainly why lenders impose a higher interest rate for a second mortgage as well as have stricter requirements before giving approval. Lenders have to pay higher insurance for a second mortgage to make sure that they are covered in the event of the homeowner going bankrupt. As for the homeowners, a new debt on top of an existing one will always make things riskier.

Is It Time for You to Get a Second Mortgage?

Assess whether you truly need a second mortgage and whether you can qualify for one. Note that requirements vary from one lender to the other. Try to gauge if the risks will be worth it for you. Better yet, contact us at Mortgage Central to talk to our mortgage professionals. We’ll be able to answer your questions to help you make an informed decision.

Only Get a Second Mortgage After Reading This!

Some people dive into applying for a second mortgage without knowing what they are doing. As a result, their process usually takes longer, end in non-approval, or they apply for the wrong type of second mortgage for their situation. These are factors why some people end up getting disappointed and intimidated with the process of getting a second mortgage. With this article, we hope that the application process will be easier for you as you find out what to expect and more!

Definition of a Second Mortgage

A loan taken on top of an existing mortgage and secured by the value of your home is essentially what a second mortgage is. It is called a second mortgage because it only comes second in priority to your primary mortgage. A second mortgage allows you to tap as much as 90% of your home equity depending on the lender you’re talking to and other factors.

Reasons for Getting a Second Mortgage

The most common reasons for people who apply for a second mortgage is to pay for higher education, facilitate debt consolidation, or finance a home renovation. Some do it to avoid paying higher fees associated with refinancing such as when they are in the middle of their mortgage term. Other people choose a second mortgage because they can have an easier time qualifying for it than other types of loans.

Dangers of a Second Mortgage

Just like any other home loan, there are risks associated with a second mortgage for both borrower and lender. The borrower has a higher chance of having issues with payment and may lose his or her home in the process. The lender faces a higher possibility of not getting paid back because money lent via this type of loan only comes second in priority of getting paid as compared to a first mortgage. It is for these reasons that getting a second mortgage from a bank is near impossible for people with a less than stellar credit score and why it may make more sense to approach private lenders rather than approach banks.

Note that interest rates are higher for second mortgages because lenders need to cover the risks they are taking plus extra expenses such as insurance. Penalties and fees are higher for the borrower as well. If you’re applying for a second mortgage, make sure that you read the fine print more than once to avoid possible issues.

Should You Apply for a Second Mortgage?

Second mortgages are great for convenience if you can qualify for them. If you have a lot of home equity, you are in a good position to negotiate better terms same as when you have a desirable credit score. If you use your second mortgage in a smart way, such as for debt consolidation, you can end up saving a lot of money.

Do you need help understanding what benefits you can get from applying for a second mortgage in Canada? We’ll be happy to discuss it with you! Contact us and our team will try their best to give you top-notch mortgage help!

8 Things You Must Know About Second Mortgages in Canada

Second mortgages are nothing new to most Canadian homeowners; however, not everyone has an equal understanding of what a second mortgage really is and how it can benefit them. For starters, a second mortgage is a secured loan with the security being the home equity. It is a type of home loan that allows homeowners to tap into their home equity.

Second Mortgages Come in Different Forms

Do you know that there are different types of second mortgages? As a loan product, a second mortgage can be accessed as a lump sum in the form of a home equity loan, or as a revolving line of credit in the form of a HELOC.

Second Mortgages Common Uses

Most Canadians get a second mortgage to help them consolidate debt. By using a second mortgage to pay off high-interest debts, they save on interest as well as make payments easier to manage for themselves. Another common use for a second mortgage is to finance home upgrades or home renovations. By doing this, a homeowner can significantly increase the value of his or her home and effectively make the debt pay for itself.

Your Home is On the Line if You Apply for a Second Mortgage

Because this type of loan products uses your home equity as collateral to the lender, the lender is entitled to take the collateral in the event that you fail on your obligation to pay. If you are sure that you can pay, though, this loan product offers significantly lower interest than unsecured loans.

There are Flexible Payment Options

Do you know that some types of second mortgages allow you to make interest-only payments? This gives you more room to maneuver with your finances such as when you use the second mortgage to pay for renovations to increase your home’s value, pay only the interest, and pay the loan after you sold your home for a much higher price.

Your Home Equity Can Be Used for Lots of Things!

Need money for an investment opportunity? Use your home equity! Have expensive tuition? Pay that with your home equity! These are just a few of the ways that you can leverage your home equity to make your life easier.

You Can Borrow A Lot or a Little

The amount that you can borrow is based on the equity you have on your home. If you’ve built huge home equity and need a lump sum, then get a home equity loan. If you need recurring smaller amounts for a period of time, then a HELOC is for you. These loans allow you to borrow 60-85% of your home equity depending on other factors.

Borrowing Isn’t Free

Because borrowing from your home equity requires paperwork and other processes, there are fees that you have to pay. The fees can vary from lender to lender so it is best to ask around before you make a decision. Don’t forget to ask about early payment fees as well.

Interest Rates Vary Too

Depending on the type of second mortgage you go for, the interest payments can vary by as much as thousands of dollars because of the difference in interest rates. If you can talk to a mortgage broker who is connected with a lot of lenders, you stand a better chance of getting the best interest rate.

Are you interested to apply for a second mortgage? Make sure that you understand what second mortgages are and how they can help you! Contact us to discuss your options for tapping your home equity!

Still Thinking About Getting a Second Mortgage, a HELOC, or a Refinance?

More homeowners are fast becoming aware of the many ways that they can make their home equity work for them. We’ve talked in the past about how you can pay for a home renovation or consolidate debt by using the equity you’ve built up in your home. The question is, what is the best way to tap into your home equity? Should you refinance? Get a HELOC? Or should you apply for a second mortgage?

Each of the above has its own set of advantages and disadvantages. A HELOC would be great for someone who is not yet sure how much he or she needs. For someone with a concrete plan in place, getting a lump sum via a second mortgage or a refinance may sound great. What could be the best option for you? Let’s take a closer look below.

Get a HELOC

A HELOC allows you to tap into a line of credit as needed, with the limit set to up to 65% of your home’s value. Interest-only payments can be negotiated with your lender and the fees are minimal if not nonexistent. HELOCs are also available for those who’ve garnered at least 20% of their home’s value in equity. The downside is that HELOCs tend to be kinder to people with a good credit score; however, there are private lenders who may consider those with bad credit too. As mentioned earlier, a HELOC is the smart choice if you’re expecting big expenses but not sure yet when and how much money you’ll need because it offers flexibility.

Choose Mortgage Refinance

Refinancing one’s mortgage is a good choice when one is sure of how much money is needed. A mortgage refinance can allow a homeowner to tap as much as 80% of the home’s value and can be given to someone who has at least 20% equity in his or her property. Interest may be fixed rate or variable rate. A downside is that you’ll be charged interest on the entire value whether you actually use the funds or not. Another downside is having to pay prepayment penalties that can go up as high as 3 months of interest. Note that monthly payments are often easier to manage for a refinance because they usually have a set value.

Apply for a Second Mortgage

People who do not qualify or got turned down for a refinance or a HELOC often have better luck applying for a second mortgage. A second mortgage is friendlier to those who don’t have substantial home equity and have a less than desirable credit score. Cons for a second mortgage include having to pay quite a number of fees such as lender’s self-insured fees, legal fees, appraisal fees, and mortgage fees. This makes a second mortgage less attractive for potential borrowers but even so, if you’re someone who’s truly in need of money, a second mortgage is your best bet.

Are you thinking of tapping your home equity? Contact us today so we can help you weigh out which of the above may work best for you.

You May Not Know This Yet About A Second Mortgage

Getting a second mortgage is a huge financial step that requires thoughtful consideration and planning. It isn’t something that you can do just out of the blue or for no real reason because getting approved for a second mortgage means getting a home loan with your property as the collateral. It is best to make sure that you truly understand what you’re getting yourself into before getting a second mortgage.

Is a Second Mortgage Risky?

Like any other secured loans, a second mortgage carries risks for the borrower as well as the lender. The lender shoulders the risk of not getting paid because of the nature of the second mortgage as a secondary loan; and thus, not a priority for payment like the primary mortgage. The borrower carries the risk of losing his or her home if he or she can’t honour the terms. The risks are real but they shouldn’t be an issue if the borrower has the ability to pay and the wisdom to not borrow more than what he or she can afford.

Reasons for Getting a Second Mortgage

People apply for a second mortgage for a variety of reasons. The most commons ones are to fund a home renovation, pay for higher education, or to spend for a big project. Another possible reason is not wanting to break the terms of an existing mortgage as well as avoid having to pay associated fees. Some people apply for a second mortgage so that they can use their home equity for debt consolidation.

With the above said, it is easy to see how getting a second mortgage can be of great help as long as the funds acquired are used in a smart way. One doesn’t have to be in dire financial straits to consider getting one.

Fees and Interest for a Second Mortgage

Because a second mortgage is riskier for the lender as compared to a primary mortgage, it is understandable that the interest rate is also higher. However, it is not as high as the interest imposed for personal loans such as those for credit cards.

Note that a second mortgage comes with standard fees as well as other possible fees if you decide to pay more or pay earlier. To make sure that you’ll not be charged penalty fees, read the fine print in your second mortgage terms and familiarize yourself with the second mortgage ‘rules’ that apply to your loan contract. Your mortgage broker should also help you understand the terms if you availed of professional mortgage services.

Should You Get a Second Mortgage?

A second mortgage can give you convenience and financial elbow room to help get you right on track if done right. You must consider what you’ll be using the loan for as well as your cash flow for the duration of the terms to make sure that there won’t be issues. The benefits must outweigh any possible cons. Do you need professional help for getting a second mortgage? Contact us and we’ll do our best to be of assistance.