Disadvantages and Advantages of Second Mortgages and How They Work

Deciding whether to get a second mortgage or not is a serious financial decision. After all, applying for a second mortgage means using your home equity as collateral for a loan.

How Does a Second Mortgage Work?

When you apply for a second mortgage, the money lent to you is held against the value of your home equity. Failure to repay the loan can mean losing your home to foreclosure because that is the only way the lenders can recoup their losses in the event of non-payment. You have to be sure about the type of second mortgage that you get and the payment terms that you agree to in order to make sure that getting a second mortgage will work for you.

Advantages of a Second Mortgage

Second mortgages are an attractive loan option for homeowners for many reasons. Perhaps the biggest reason is the loan amount. With a second mortgage, you can borrow as much as 80% of your home equity and choose whether to get that as a line of credit or a lump sum. That’s a lot of cash that can be used for a big project.

Another advantage is lower interest rates compared to other types of loans. A credit card loan or a personal loan charges many times the interest charged by a second mortgage. Note that compared to a primary mortgage, a second mortgage’s interest is a bit higher because the loan carries more risks of non-payment for the lender.

Tax Benefits are another advantage. There are some laws that will allow those with second mortgages to deduct their mortgage interest from their taxes especially if the funds were used to improve the home. The tax benefits may vary by province and year.

Disadvantages of a Second Mortgage

The risk of losing one’s home is the biggest disadvantage of a second mortgage. However, this risk can be managed and mitigated if you work with mortgage professionals who will help you decide on a second mortgage with terms that are right for you.

Another disadvantage is loan costs. Getting a second mortgage comes with fees for things such as appraisals, credit checks, origination fees, and more. You have to know that closing costs and the fees can easily amount to thousands of dollars. Choose a lender that will let you know how much you will be expected to pay before getting a second mortgage.

Uses for a Second Mortgage

To make a second mortgage work for you and be worth all the possible disadvantages, it is best to have a clear purpose for the loan. Smart uses for a second mortgage include paying for home renovation or improvement, loan consolidation of high-interest loans, financing higher education that can be used to improve job prospects and pay grade later, and other forms of investing.

Are you looking for a lender for a second mortgage in Canada? Talk to us at Mortgage Central Canada and we will be happy to address your concerns and questions. We will also help you get approved!


Read This if You’re Applying for a Home Equity Loan

Applying for a home equity loan is getting more attention these days as more people need access to the value they’ve built up in their home equity. As a type of second mortgage, a home equity loan helps people get a lump sum of cash that they can use to achieve their financial goals, may it be debt consolidation, home renovation, more investments, or higher education.

The Good About a Home Equity Loan

A home equity loan comes with pros and cons same as with other types of loans. It can be a relatively easy way to access a substantial amount of money as the home equity is used as collateral. It can be tempting to apply for one as any interest can possibly be claimed as a tax deduction, not to mention that it already enjoys a lower interest rate compared to other loans because it is a secured loan.

The Bad About a Home Equity Loan

Because a home equity loan is secured by the home equity, there is a risk of losing the home if the debt is not paid in time. It is also secondary only to a primary loan in the event of foreclosure to there are additional costs upon approval other than the closing fee.

Should You Get a HELOC or a Home Equity Loan?

Most people are confused regarding the difference between a HELOC and a home equity loan. They do sound alike; however, they differ in how the funds are made accessible to the homeowner. With a HELOC, the borrowing homeowner is given a line of credit whereas with a home equity loan, the loan is given as a lump sum of cash. Repayments come later for a HELOC while with a home equity loan, there will be fixed monthly payments until the loan is fully paid off. What is best for you depends on how much cash you need, your cash flow, and your ability to repay together with other factors. Your mortgage professional will delve into this further with you before finalizing your application for approval.

How to Get a Home Equity Loan

To get the best terms, you should consider inquiring from several lenders to compare interest rates, costs, possible loan estimates, and more. If you can, work with a mortgage professional to make this process easier for you. Once you send in an application, the lender will check your credit and ask you for an appraisal to properly gauge the value of your property. The entire process can take a few days to a few weeks depending on each lender’s requirements.

Poor credit is usually not a detrimental factor for you to get approved. What matters the most is your home equity. Based on this and other factors, the lenders will compute what loan amount they are comfortable lending to you. Note that things may be a little different from HELOCs but basically, you will be asked to submit nearly the same requirements.

Find a Good Lender

The best home equity loan lender for you is the lender that can save you the most money in the long run. You will have to look into fee structures, the advantages and disadvantages of loan programs available, and how they take their time to make sure that you understand the options you have. At Mortgage Central Canada, we will assist you in shopping for the ‘best-fit lender’ for your needs. Contact us today!


Your Guide to Debt Consolidation

Debt consolidation is a means to get out of debt faster by combining multiple debts into a single loan with easier payment terms. By combining several debts into one, you will find it easier to handle your monthly budget and enable you to set aside more money towards loan repayment.

How Does Debt Consolidation Work?

The most common way to consolidate debt is by taking out a debt consolidation loan. A debt consolidation loan is typically a large loan with a relatively lower interest rate than your existing loans and used to pay off existing loans so that you’re left with just one loan to take care of later. The idea is to save on interest and to make loan repayment a lot easier for you.

There are many ways to consolidate debt. The first step is to determine which of the different types of debt consolidation loans to use by assessing which will be most beneficial for you. You may choose from the following:

Using a Balance Transfer Credit Card

If you have a small amount of debt and you think you can pay everything off in a year, moving all of your debt on one credit card may be a good idea. The downside is you usually need an impeccable credit score to qualify for this.

Getting a Secured Loan

If you’re a homeowner or a car owner, you can use your property to borrow money with a lower interest rate. Qualifying for a secured loan for debt consolidation have a varying degree of success and largely depend on how valuable the property you are willing to use as collateral is.

Using Debt Relief

If you’ve exhausted other means of debt consolidation, you may want to look in using debt relief. A debt company will negotiate with your creditors to lower your monthly repayments and APR or negotiate other terms on your behalf. The downside is that this usually comes with a lot of restrictions as well as other requirements that you must comply with.

Applying for a Personal Loan

If you need to pay off huge debts and is willing to take several years to pay off your debts, applying for a personal loan may work for you. With a personal loan, you will borrow a large amount of money to pay off your existing debts and in turn, you’ll end up with a single debt to pay off per month based on the terms you’ve agreed to. A personal loan usually requires that you have a stable income and relatively good credit rating to qualify.

Home Equity Loan for Debt Consolidation

If you’re a homeowner, you may tap into your home equity for debt consolidation. You can choose to get a second mortgage or apply for a home equity line of credit to convert your existing debts into a single lower-interest loan.

Debt consolidation is just the first step towards a debt-free life. You must work hard to identify and stop the behaviours that got you into debt for long-term financial management. Contact us if you want to know more about how you can use your home equity for debt consolidation and how to qualify for a debt consolidation loan even with bad credit.