What is a Second Mortgage? - Should I Get One?

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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Pros And Cons Of 2nd Mortgages

Pros:

A second mortgage will be beneficial for those people who are stuck in a high interest debt such as credit card or personal loans. The rate of interest for a second mortgage is hovering around 5%-6%, therefore, for people with a 20% debt on a credit card, taking a second mortgage can work well. By tapping the equity in your home, you can also pay for some of your imminent needs without taking a higher interest rate loan. 

People who took out their first mortgage when the rates were incredibly high can also benefit from refinancing their home. They can save a considerable amount of money in the long term by taking advantage of the low rates.

Another advantage of taking a second mortgage loan is that the interest that you pay on it is tax-deductible (at least a part of it). Many people who want to benefit from tax deductions can benefit from taking out a second mortgage.

Cons:

One of the biggest disadvantages of a second mortgages is that it means that you have to start from scratch in building equity in your home. It increases your debt-to-asset ratio and it will take you longer to become the owner of your home.

Lenders use the value of the property as collateral while offering you a refinancing mortgages. While it may help you in getting low rate of interest, you run the risk of losing your home in case you face a financial catastrophe.

People who refinance their homes have to pay the charges/fees that are associated with taking a mortgage. Although many homeowners find it unfair that they are charged these fees again, the reality is that these charges can offset any gains that you are thinking of making by taking out a second mortgage.

3 Best Tips For Mortgage Refinancing

Tip 1: Study your financial background 

Before you go for refinancing mortgages, make sure that you study your financial background thoroughly. See to it that the information contained in your credit report is true and up to date, since one wrong record can limit your loan options and jeopardize your financial stability badly. If you find anything suspicious, immediately bring it to the notice of the concerned authorities and get it corrected then and there.

Tip 2: Shop Around

Once you are assured of your credit report, shop around for lenders who are competent for your deal. With the changes in the finance industry, many lenders have started offering loans to borrowers who were sidelined by the traditional creditors such as banks, and lending institutions and agencies. Also, it has been observed that there is a great difference between the interest rates that these lenders charge for the loan. So, experts often stress on a thorough research about lenders before settling on a particular deal. For more information about the shortlisted lenders you can visit their websites and even ask friends for suggestions and recommendations, if any.

Tip 3: Get your rates confirmed

With the mortgage rates at their all time low, many homeowners have opted for refinancing and tapped the equity built so far. But, this does not mean that the rates will remain steady in future as well. Therefore, as a borrower, ensure that you get your rates locked, in written, by the respective creditor. By doing this, you will not only outsmart the risks of market rates going up but it will also bring to the notice of the lender, how vigilant and well informed you are. Also you must ask for a detailed description of the fee to identify any hidden costs before signing on the dotted line. 

These are some very basic tips which when taken into consideration can save you from great losses. 

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Getting A Home Loan With Bad Credit

Getting a home loan with bad credit may seem to be one of the most complicated and cumbersome task, but there are some ways to overcome this problem and improve the chances of your home loan getting approved. Let us have a brief look at some of these measures as follows:

1. Watch your expenses

One of the best ways to improve your credibility is to cut down on unnecessary expenses. Refrain from sale offers that do nothing more than adding extra bills to your credit card. Use your credit limit wisely and try to save as much as you can. If possible, go for some additional payments on your monthly credit bills, since it will pull up the credit score and create a good impression.

2. Look for lenders who do not pay heed to credit rating

Traditional lenders such as banks and lending institutions and agencies often gauge the borrowers on the basis of their credit score. If the borrower fails to meet their criteria, they are merely sidelined. But, now-a-days the situation has changed. Many lenders have started offering mortgage with bad credit to provide this group of borrowers with the necessary financial aid. Unlike the typical lenders, these creditors do not use the credit rating to assess your home loan application. It is recommended to shop around for such creditors and get your requirements discussed.     

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Tips On Private Mortgage Refinancing

Any news of a drop or a rise in the long term interest rates gets many homeowners thinking about whether refinancing their mortgage could be beneficial to them. Refinancing can be a wise strategy to save money on a long-term basis. It can also help a homeowner in curtailing the duration of his mortgage. However, there are a lot of factors that one needs to keep in mind before joining the ‘refinancing bandwagon’. Refinancing without understanding your financial needs and the current state of your property could turn out to be a financial nightmare for you. In the following points, we will take a look at some Refinancing Solutions which can be beneficial for those who are thinking about refinancing mortgages.

Shop Around for the Best Deal

The first thing you should do is to check out the best deal in the market. If you have a handsome equity in your home, and your credit score is on the higher side, there is no reason why lenders won’t make a beeline to offer you some of the better deals. Ideally, you should be looking at getting a quote from at least five different vendors. If you have had no issues with your current financier, you can also have a look at what they have to offer to you. Credit lending institutions understand the importance of keeping a customer; therefore, there is likelihood that you will get some competitive quotes from them. Apart from comparing the interest rates, you should also check about the reputation of the lender. There are a lot of hidden costs and fees that lenders usually avoid or conveniently ‘forget’ to discuss during their sales pitch. Established lenders, who have a reputation for providing exceptional customer service, are often more transparent in their dealings. Therefore, you should carefully take a look at all these options before signing up with a lender to refinance your mortgage.

Look to Reduce Interest Rate Substantially

As we mentioned in the beginning of the article, any news about the drop in the interest rates sets homeowners in ‘refinancing mode’. An important thing that all homeowners should understand is that there are significant costs associated with closing your old mortgage and starting a new one. Therefore, unless you are able to reduce your interest rate substantially, you should think twice before even considering refinancing. For example, if you are paying a 9% interest rate on a 30-year mortgage, which has a fixed rate of interest, refinancing it to avail an 8.95% fixed-rate interest might not be in the best of your interests. On the other hand, if the new loan is cutting down your interest rate by 1% or more, you should definitely give the offer a further thought.

Check Your Credit Score

Amidst the whole talk of refinancing, one of the important parameter that gets overlooked is the credit score. Lenders are laying added emphasis on the credit score of the applicant. Refinancing your home involves a lot of paperwork, and the last thing you would want is not being eligible due to a low credit score. Ideally, a credit score of 700 or more will see you through, but if you credit score is hovering on the 650+ range, you might need to accept a relatively higher interest rate from the lender.

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