Using the equity in your home can be an excellent way to secure a loan at a great interest way. One way to do this is through a second mortgage. But how do you know if a second mortgage is a right option for you? In this article, we will discuss how a second mortgage works and the reasons you might want to consider getting one.
What is a second mortgage?
A second mortgage is a loan which is secured by the equity in your home. The equity in your home is the amount that your home is valued at today minus the amount you still owe on your mortgage, and most lenders will let you borrow up to 80% of your home equity through a second mortgage. That means that if your home is worth $500,000 and you still owe $100,000 on it, your home equity is $400,000 and you can likely get up to $320,000 with a second mortgage.
Once you get your loan, your second mortgage is paid off monthly (or sometimes bi-weekly) in the same way that you pay off your first mortgage. When the mortgage term is up, you may choose to pay off the loan in full or to renew it for another term.
Advantages of getting a second mortgage (over other types of loans)
There are many reasons why you might consider getting a second mortgage when you compare it to your other loan options:
- Low-interest rate – while a second mortgage will usually have a slightly higher interest rate than a first mortgage, interest rates on second mortgages are still much lower than they are on unsecured loans.
- No need to break your first mortgage – unlike mortgage refinancing, getting a second mortgage does not require you to break your first mortgage. This means you won’t have to pay a penalty.
- You don’t need perfect credit – since a second mortgage approval is based mainly on how much equity you have in your home, it is possible to get this type of loan even with damaged credit.
Reasons to get a second mortgage
Here are a few common reasons why homeowners choose to take out second mortgages.
- Debt consolidation – if you are struggling to pay off consumer debts, the low-interest rate you can get on a second mortgage makes this a good type of loan to use for debt consolidation.
- Home renovations – since home renovations often require larger amounts of financing and add value to your home itself, a second mortgage can be a natural fit for funding a home renovation project.
- Other large expenses – a second mortgage with its low-interest rate and potential for a large sum can make it a good fit for other large expenses such as vehicle finances or start-up costs for a business.
Considering a second mortgage? Call us today to speak to a mortgage broker.