A second mortgage is a type of loan that is taken out against the equity of a home. Equity is the amount that you actually own of the home, based on how much you have paid toward it so far. Once you’ve accrued a significant amount of equity (which will be determined by your lender), you can borrow it to cover major expenses. This type of loan does carry with it an interest it. It must also be paid in tandem with your existing mortgage. This is common knowledge, but what about the little details? Here are five things that you may not know about what it’s like to take out a second mortgage in Canada.
Poor Credit? A Second Mortgage Can Help:
One of the most common uses of a second mortgage is to consolidate large amounts of unsecured debt, like credit card debt. Having access to your home’s equity enables you to pay off these balances in full and in one fell swoop. As you may guess, this can have a tremendously positive impact on your credit score and reflect favorably on your credit report.
You might not think that you can qualify for a second mortgage if you have poor credit, but it is possible. You may just need to recruit the help of someone who isn’t tied to a traditional lending institution. A mortgage broker could help you significantly in getting a second mortgage with poor credit.
Once you’ve paid off your debts, you will only have this single, simple payment to make each month. This will undoubtedly help you breathe easier and sleep better, as you know that your finances are now in order and your outstanding debts have vanished.
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Never Forget About Those Interest Rates:
Just like you shopped around for the best rates with your first mortgage, you need to do this with your second. No, you don’t have to get a second mortgage from the same lender you obtained your initial mortgage with. This fact affords great flexibility to consumers, who do not want to be trapped with higher interest rates if they don’t have to be.
A mortgage broker can help you shop around and find the best rates that you qualify for, often at no expense to you.
Your Home Becomes Collateral:
If you default on your second mortgage loan, it’s very likely that you will face foreclosure as a result. Having your home as collateral is a double-edged sword. On one side, having a physical asset (your home) as collateral offers substantially lower interest rates. On the other side, however, you have to be confident that you can make your monthly payments lest you risk losing the home entirely.
Second mortgages can be quite risky, but the benefits of their use cannot be under-stated. If you are capable of making monthly, on-time payments toward both your first and second mortgage, you could stand to gain a lot in obtaining a second mortgage. You could fund that big home renovation, pay for your or your child’s higher education, set aside an emergency fund, pay off credit card debt, and tackle other hefty expenses that life has thrown at you.