So, you have
heard a lot of people talking about second mortgages, but are yet to get a gist
of what it exactly means. Well, simply put, as the name suggests, a second
mortgage is an additional loan against your home; it gives you access to the
equity in your home. For example, if your home is worth $200,000, and you have
paid off $100,000 (including the down payment and subsequent installments), you
have $100,000 of equity in your home. A second-mortgage lender takes into
account this equity and offers you a loan.
Why do Homeowners Take It?
There are a
number of reasons why people take out second mortgages; some do it to pay off
their other high-interest loans, such as credit cards, auto loans, while some
want to use the money to fund a home renovation or say, child’s education. Whatever
the reasons may be, it is important that you consider the implications of
taking out a second mortgage. Like a conventional mortgage, the lender files a
lien against your home, meaning that if you default on your payments, you could
end up losing your home.
Types
There are two
types of second mortgages – home equity loans and line of credit. The former
gives you a lump sum amount (depending on the equity in your home), which you
have to pay along with the interest in a stipulated time. Line of credit on the
other hand works more like a credit card; you have access to a certain amount
of credit limit, and you can draw on it anytime you want to, provided you do
not exceed the maximum amount.
It is Another Debt
While the
idea of capitalizing on your home’s equity is tempting, you need to understand
that at the end of the day, you are adding one more debt for which you will
need to make monthly payments. Taking a second mortgage also involves
additional costs, such as the cost of appraising the property, processing fees,
annual fees, etc. The important thing that you need to keep in mind is that if
you are not able to repay the loan, your home will be on the line.
Average Interest Rates
For homeowners
in Toronto who are looking forward to take a second mortgage, it might be
worthwhile to know that the interest rates are in the range of 10% to 15%. If
you have considered all your alternatives and definitely want to take it,
remember to take the services of a well-known and credible lender.
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