Does a Second Mortgage Differ from A Home Equity Line of Credit?

A home equity line of credit is not the same as a second mortgage although the other term for a second mortgage sounds like it. A second mortgage also goes by home equity loan and some people are confused about the difference between the two. Both are types of mortgage loans that go on top of a primary mortgage but they differ in how the funds are made accessible to the homeowner. With a home equity loan, the money is handed out as a lump sum while with a HELOC, the money is made available as a revolving credit line, very much like a credit card.

How Does a Home Equity Line of Credit Work?

A HELOC works as a revolving line of credit. This line of credit is opened by the lender using the home equity as a guarantee against the credit line. This means that a borrower can keep borrowing and paying the line of credit for as long as and as much as the term allows during the draw period which typically lasts for about 10 years.

The payments and interest for a HELOC vary per month based on the amount borrowed. The repayment period typically lasts for about 20 years. If no amount was used up during the loan period, then there is nothing to pay back because the homeowner technically doesn’t owe anything from a HELOC until they draw from the line of credit. Note that if the home’s value drops significantly, the line of credit may be frozen by the lender and missing payments can mean risking losing one’s home.

How Does a Second Mortgage Work?

A second mortgage uses the home’s equity as collateral. The homeowner is allowed to borrow money based on the equity that they have. This money is given out as a lump sum at the beginning of the loan. The loan then follows a fixed payment amount and interest until the entire loan is paid off. Once paid off, the homeowner can borrow again.

Missing payments on a second mortgage can place your home at risk of foreclosure. It is best to make sure that you can afford to pay both the primary mortgage and second mortgage before getting one.

Is A Second Mortgage Better Than A HELOC?

People use a HELOC or a second mortgage to meet their specific needs because each comes with their set of pros and cons. Both can be used for big and small expenses such as paying for home renovation, financing debt consolidation, funding higher education, and more. Both can result in losing one’s home for failure to make payments.

Can A Second Mortgage or a HELOC Be Used as An Emergency Fund?

Technically, the answer is yes but ideally, no. It can take a few days to a few weeks for the loans to be approved and so they can’t be relied upon in an emergency unless the loans are already existing. It is best to have some savings for an emergency for optimum financial stability.

Get A Second Mortgage or a HELOC Now

If you’re thinking of applying for a HELOC or getting a second mortgage, it is best to consult with trusted mortgage professionals first to find out which one may be better based on your specific circumstances. Contact us at Mortgage Central Canada so that our team can address your concerns. We are available to serve you in these trying times.

Things to Consider Before Getting A Second Mortgage

There are many things to consider before getting a second mortgage. First is the fact that a second mortgage is a loan that goes on top of a primary mortgage, meaning, it is an additional loan that uses the home’s equity as collateral. Another big factor is whether the purpose of the loan is worth it for the hassle of getting the loan. After all, it isn’t a secret that getting a second mortgage involves a few steps that take time, effort, and money.

Mortgage rates are at a historic low for September 2020 in Canada, paving the way for an increase in refinancing and homebuying. This may be a reason why you might be interested in getting a second mortgage at this time. However, you must know that interest is just one of the things to consider for getting a second mortgage. Below are other factors that you must look into.

Cost of a Second Mortgage

Getting a second mortgage is not cheap. The cost will vary depending on how much you will be borrowing, your lender, and what type of second mortgage you will be taking. You will have to pay a closing cost as well as an appraisal fee, underwriting or application fee, recording fees, and possibly more especially if you will be applying for a second mortgage from another lender other than the one you have for your primary mortgage. The lender may charge a fee for a second-lien position as a form of insurance for the extra risks that the lender will be taking.

Uses for a Second Mortgage

You can use a second mortgage for almost anything that needs a large sum of cash. Most people use theirs to pay for a home renovation and for debt consolidation. Some get a second mortgage to pay for an investment such as a new business, another property, or higher education.  For some people who use their second mortgage for debt consolidation, they do so because they end up saving thousands of dollars in the long run. Whatever you use your second mortgage for, it is best to consider if the purpose will outweigh the risks. The result has to be worth your time, money, and effort.

Second Mortgage Alternatives

If you’re looking for ways to access your home’s value for funding, getting a second mortgage is not the only way to achieve that. Mortgage refinancing is an option more so if you do not qualify for a second mortgage. This may result in a lower amount that you can use but is worth consulting with a mortgage professional with.

Other Points to Remember

A second mortgage is an additional financial burden because it is a loan taken on top of the mortgage loan you already have. Getting a second mortgage may make you more vulnerable to risks of losing your home.

There are several types of second mortgage that each come with pros and cons. Consulting with a mortgage professional is a smart move to make sure that you are choosing the best fit for your needs and financial capabilities.

If you’re looking for mortgage professionals to assist you in getting a second mortgage in Canada, contact us at Mortgage Central Canada.