Buying a new home is usually a lifetime goal for everyone. You might have put countless efforts and saved every single penny from your earnings for buying a new home in Canada. But until and unless you have a complete knowledge about investing the finances in a beneficial way, you cannot crack a profitable deal. Opting for a mortgage is one of the wisest decisions while trying to buy a new home in Canada.
But sometimes, just one mortgage loan is not enough for the upcoming and unpredictable years of life. Do you know that you can also opt for one more mortgage loan for your purchase?- Yes, you can apply for a second mortgage also. You just need to have a complete knowledge about the second mortgage conditions, its rates, and its working. Sounds beneficial, right?- Want to know everything about second mortgage?- Read below to know about its working, types, rates, conditions, and the application process.
What is a second mortgage?
Homeowners should know that they can take more than one mortgage loan on the same property. If they have taken one loan while purchasing their home, it is known as their primary or first mortgage loan. Whereas they can take one more loan before even completely paying off their first loan, which is called as second mortgage loan. You can deal with life’s tough situations if you have a proper knowledge about second mortgage loan. If you have already taken a primary mortgage on your home, opting for a second mortgage can be helpful in situations like-
But out of the two loans, your primary mortgage loan would be prioritized. This means that in case you fail to pay off the loans, you will lose your home and your first mortgage lender would get his payments first. So, in such situations, your second mortgage lender is at a higher risk.
What does home equity mean?
Yes, second mortgage loans are beneficial. But they have conditions too. Before you start thinking about applying for a second mortgage, it is important to understand what home equity is. Home equity helps in calculating the net amount that you can get from your second mortgage. As you know, second mortgage can be applied without even completely paying off your primary mortgage. So, the net amount of second mortgage would depend on the pending balance of your primary mortgage also. Home equity is the difference between the net worth of your home and the pending balance amount of your primary mortgage. For example, if the net worth of your home is $3,25,000 and the pending balance of your primary mortgage is $2,25,000. Then your home equity worth is $1,00,000. Home equity amount can increase in two situations, which are-
Working of a second mortgage-
Second mortgage loan allows you to use your home equity for dealing with your high-interest expenses at the present moment. You will be able to use your home equity finances instead of being stuck with tied up finances. Different mortgage lenders will have different conditions for second mortgage. But one main requirement is that you have some equity built up for your home. You can apply for taking only a portion of this home equity (usually 80%). Your second mortgage lender will consider the difference between the net worth of the home and the pending balance of the first mortgage loan. This is to ensure that your home still has some equity left, which is usually 20%. Most of the times, second mortgage applicants need to have a credit score of 620 (varies for individual lenders).
Types of a second mortgage-
Opting for a second mortgage loan is beneficial, but you need to be wise enough to know its conditions and types. Second mortgage is basically of two types, and they are-
For example if your home is appraised for a worth of $5,00,000, then 80% of this value is $4,00,000. If the pending balance of your first mortgage loan is $2,00,000. You can apply for up to $2,00,000 in your second mortgage loan.
Aspects of a second mortgage-
Some important aspects of second mortgage loan are-
What are second mortgage rates?
Considering the second mortgage interest rate value is very important. As stated above, the second mortgage interest rates are higher than those of primary mortgage loans. This is because the second lender is taking a higher risk for his money. As in case, you fail to pay off your loans, the second lender will get second priority for the repayment of his loan.
Why do you need a second mortgage?
Applying for a second mortgage gives you the freedom to use your home equity for a large variety of potential expenses. You can actually use the value of an asset to increase the value of your asset only. The main reasons to apply for a second mortgage loan are-
Conditions for getting a second mortgage loan-
To apply for a second mortgage, you need to agree to the following conditions-
All lenders will not have the same conditions for second mortgage loans. Their conditions differ in terms of price, offer, fees, and interest rates.
How to apply for a second mortgage?
You need to satisfy the basic conditions as well as your lender’s imposed conditions to apply for a second mortgage loan. Usually the lenders take in account your-
Once you have thought of all the above-mentioned factors, and are sure to apply for a second mortgage loan, you should know about the process of applying for it. For a second mortgage approval, your lender would look into the following in detail-
What is a second mortgage?
Homeowners should know that they can take more than one mortgage loan on the same property. If they have taken one loan while purchasing their home, it is known as their primary or first mortgage loan. Whereas they can take one more loan before even completely paying off their first loan, which is called as second mortgage loan. You can deal with life’s tough situations if you have a proper knowledge about second mortgage loan. If you have already taken a primary mortgage on your home, opting for a second mortgage can be helpful in situations like-
- Paying for your child’s tuition fees,
- Paying off your high consumer debts,
- Arranging quick funds for emergency,
- Planning an investment, and
- Renovating your home, etc.
But out of the two loans, your primary mortgage loan would be prioritized. This means that in case you fail to pay off the loans, you will lose your home and your first mortgage lender would get his payments first. So, in such situations, your second mortgage lender is at a higher risk.
What does home equity mean?
Yes, second mortgage loans are beneficial. But they have conditions too. Before you start thinking about applying for a second mortgage, it is important to understand what home equity is. Home equity helps in calculating the net amount that you can get from your second mortgage. As you know, second mortgage can be applied without even completely paying off your primary mortgage. So, the net amount of second mortgage would depend on the pending balance of your primary mortgage also. Home equity is the difference between the net worth of your home and the pending balance amount of your primary mortgage. For example, if the net worth of your home is $3,25,000 and the pending balance of your primary mortgage is $2,25,000. Then your home equity worth is $1,00,000. Home equity amount can increase in two situations, which are-
- If you pay off your first mortgage, and
- In case the net worth of your home increases.
Working of a second mortgage-
Second mortgage loan allows you to use your home equity for dealing with your high-interest expenses at the present moment. You will be able to use your home equity finances instead of being stuck with tied up finances. Different mortgage lenders will have different conditions for second mortgage. But one main requirement is that you have some equity built up for your home. You can apply for taking only a portion of this home equity (usually 80%). Your second mortgage lender will consider the difference between the net worth of the home and the pending balance of the first mortgage loan. This is to ensure that your home still has some equity left, which is usually 20%. Most of the times, second mortgage applicants need to have a credit score of 620 (varies for individual lenders).
Types of a second mortgage-
Opting for a second mortgage loan is beneficial, but you need to be wise enough to know its conditions and types. Second mortgage is basically of two types, and they are-
- Home equity line of credit (HELOC)- The net amount that you can get in Home equity line of credit (HELOC) depends upon the equity value that you have built in your home. You can apply for getting a maximum of 80% of your home equity value.
For example if your home is appraised for a worth of $5,00,000, then 80% of this value is $4,00,000. If the pending balance of your first mortgage loan is $2,00,000. You can apply for up to $2,00,000 in your second mortgage loan.
- Home equity loan- In a home equity loan, you can get a lump sum amount of money when you use your home as a collateral. You just need to find out an experienced professional lender and then you can get the second mortgage in the same way you got your primary mortgage. In the home equity loan, the interest rate is fixed. But the rate is a bit higher than that in the primary mortgage loan.
Aspects of a second mortgage-
Some important aspects of second mortgage loan are-
- The first or primary mortgage loan will be prioritized in terms of repayment. This means that in case of repayment failure, the first mortgage lender will receive the payments first. Only after the complete repayment of the first lender, the second lender will be eligible for repayment.
- The mortgage loan amount is always given against the equity amount of your home. Similar is the case with second mortgage loan. Your lender will offer you money based on the equity of your home.
- The second mortgage interest rates are higher than those in primary mortgage loans. Basically, the second lender is taking a higher risk because of the second priority in case of payment failure. So, the interest rates are higher for him.
What are second mortgage rates?
Considering the second mortgage interest rate value is very important. As stated above, the second mortgage interest rates are higher than those of primary mortgage loans. This is because the second lender is taking a higher risk for his money. As in case, you fail to pay off your loans, the second lender will get second priority for the repayment of his loan.
Why do you need a second mortgage?
Applying for a second mortgage gives you the freedom to use your home equity for a large variety of potential expenses. You can actually use the value of an asset to increase the value of your asset only. The main reasons to apply for a second mortgage loan are-
- High-interest consumer debts- You can recover your high-interest consumer debts like credit-card debts with the second mortgage loan. This is because credit card interest rates are generally higher than those in second mortgage.
- Investments for business or real estate- The money gained from a second mortgage loan can be used for various business and real estate investments in case your bank rejects your loan application.
- Medical emergency- Medical emergencies don’t come at convenient times. Moreover, everyone doesn’t have high savings or insurance policies for such emergencies. Second mortgage loans can be helpful in such situations.
- Tuition fees of children- Falling short of savings to pay your children’s tuition fees?- Don’t worry. Just opt for second mortgage loan and arrange for your children’s requirements.
- Renovations or improvements in home- Planning for a home renovation is easy. But arranging for its expenses is a bit difficult. You can also use your second mortgage loan amount for home renovations and pay that later on.
- Increased daily expenses- When your savings are not enough for your increased daily expenses but you have great home equity value, opt for second mortgage loan to deal with your expenses.
- Improved credit score- Your credit score gets negatively affected with unpaid past bills and high debts. So, taking a second mortgage loan and paying off your high-interest debts and past bills would be a wise decision to improve your credit score.
Conditions for getting a second mortgage loan-
To apply for a second mortgage, you need to agree to the following conditions-
- The interest rates for second mortgage loan would be higher than those in primary mortgage loan.
- You can get up to 80% of your home appraised value. But the pending first mortgage amount has to be subtracted from that.
- When you start paying off your second mortgage loan, you have to continue paying off your first mortgage loan also.
- You need to have a high credit score to apply for a second mortgage loan. Usually, lenders prefer a credit score more than 620 for potential second mortgage loans.
All lenders will not have the same conditions for second mortgage loans. Their conditions differ in terms of price, offer, fees, and interest rates.
How to apply for a second mortgage?
You need to satisfy the basic conditions as well as your lender’s imposed conditions to apply for a second mortgage loan. Usually the lenders take in account your-
- Home equity value,
- The credit score,
- Income and its sources,
- Valuation and primary mortgage balance,
- Debts and unpaid bills,
- Debt-to-income ratio, etc.
Once you have thought of all the above-mentioned factors, and are sure to apply for a second mortgage loan, you should know about the process of applying for it. For a second mortgage approval, your lender would look into the following in detail-
- Confirming your income- Your lender would need to ensure that you would be able to handle the repayment. For this surety, he would ask for many paycheck stubs and the photocopies of your recent bank statements.
- Credit score rating- Your lender will most probably hire a credit reporting agency to check your credit score. You would need to have a credit score more than 620 to get your second mortgage loan approved.
- Equity value- Your assets will play an important role in getting your second mortgage loan approved. Your lender would ask for a list of your assets so as to find out your equity. Greater equity value would increase your chances of getting the loan approved.
- Your property- It is true that you can apply for a maximum of 80% of your home equity value. But your lender would himself check your property to ensure that it is worth the amount of money claimed by you. Property checking is an important step in the entire process of second mortgage loan approval.
