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At different points in life, you may require more funds than you have. This may be to cater for medical emergencies, education, setting up a business, or buying a house.
One of the most popular options is a second mortgage loan. Though it is estimated that over 1.91 million Canadians have a home equity line of credit (HELCO) and even more have a second mortgage, not many people know about, or how to access these lines of credit.
A second mortgage is a type of loan that you take up against the equity that you have built up as you pay your first mortgage. Most people take up these loans to finance renovations or pay off high-interest consumer debts.
Read on to learn all about second mortgages and how to access them in Kitchener.
Second mortgages are taken up against properties that have an existing mortgage. In addition to paying off this loan facility, borrowers must also continue to make payments on their primary mortgage, hence the name second mortgage.
Lenders are usually cautious about issuing second mortgages as they pose more risk for them. This is because first mortgage lenders are generally hesitant issuing a second mortgage, thus you will have to seek a different lender.
In the event that there is a foreclosure, the primary mortgage lender will have first priority. When this happens, the primary mortgage lender is compensated first, which puts the second lender at risk of not being fully compensated.
To approve a second mortgage, lenders will check:
To demonstrate that you have the capacity to repay a second mortgage, your lender will request pay stubs for the past few months and your two latest bank statements. Your chances are higher if you have a dependable source of income with few deductions from your salary.
Lenders will also verify your credit score and check your credit history. This will influence whether you get the loan and at which rate.
Due to the risks lenders face with second mortgages, they will request for a listing of your equity for the property. The more equity you have, the better your chances.
The more equity you have built up in your property, the higher the amount you can borrow for a second mortgage. Though terms vary with different lending institutions, you will access a loan amount of your home’s value less any outstanding debt on the property.
For instance, if your house is worth $ 1,000,000 and you have a mortgage balance of $700,000, you will only be able to access a loan amount of $ 100,000. The breakdown is as follows:
Value of your home: $1,000,000
Loan to Value (LTV) ratio: 80%
Accessible loan amount based on LTV: $800,000
Less outstanding mortgage value: $700,000
Credit limit for the second mortgage: $100,000
One of the important factors to consider is the interest rate. The interest rates charged on second mortgages are usually lower than for other loans, such as credit card debt. They are higher, however, than interest rates on home equity loans.
Expect to pay a higher interest rate for your second mortgage than with the first one. Though the interest varies with lenders, factors such as your income, property equity, and credit score will influence the rate charged. You can either be charged a fixed or variable interest rate that ranges from 4.5% to 10%.
When taking up a loan, it’s vital to understand that the little things often bear a significant impact. A small percentage difference can seem negligible, but if you tally the difference over the years, it could be a substantial amount.
Therefore, it’s crucial to choose a suitable lender. Here are some of the things you should consider:
Borrowers often focus on the interest they will be charged. Though it is crucial, the benefits of a low-interest rate may be offset with other fees. Make sure that you carefully scrutinize the loan processing fee, APR, closing costs and all origination and discount points.
After discussing with your lender’s representative, go through the written agreement to make sure all the terms are as promised. It is also advisable to have a mortgage expert review the terms for you to make sure they are favourable.
When applying for a loan, there are several crucial things to consider. Other than the loan terms, you should also consider the experience and reputation of your lender. Unfortunately, borrowers lack sufficient information to guide their choice based on such.
This is where Loans Geeks comes in. Loans Geeks is an independent financial-service network that does all the heavy lifting for borrowers. All the information you need about different loan products and financial institutions is only a few clicks away. Through Loans Geeks, you can now find the best rates, apply, and secure a loan.
The process of securing a second mortgage often takes time and can last a few weeks, depending on your lender. As such, these loans are suitable for taking access to finances for a premeditated reason.
As you make plans to apply for such a loan facility, be sure to factor in any future financial obligations. This could be a cost such as college tuition that you may start incurring after some time. By considering such aspects, you will avoid unnecessary financial strain in the future.
Some of the biggest and most reliable banks in Kitchener include:
Thinking of buying a house in Kitchener? Here are the five most affordable neighbourhoods in Kitchener:
To qualify for a second mortgage in Kitchener, you need to repay at least 20-25% of your first mortgage, ensure your credit score is good, and keep deductibles from your income at a minimum.
A second mortgage is a loan facility taken against the equity you have built up as you repay your first mortgage. These loans are suitable for financing remodelling projects or consolidating high-interest debts.
The loan amount you can access via a second mortgage depends on the equity you have built up, your income, credit score, and serviceable debts.
The process of taking up a second mortgage varies from one lender to the next, but it usually lasts between one month and one and a half months.
Since the risk of a second mortgage is higher than the first one, it tends to be about 2% to 5% more than the first mortgage products. The interest rates will also vary depending on factors such as adjustable or fixed rates, total loan value, type of property, credit score and other important factors.
If you are making application for the second mortgage loan against a home equity, you need to disclose if you are currently occupying the home or not. While you do not have to occupy the home to be eligible for a second mortgage, you might have to pay higher interest rate if it is an investment property. If you are renting out the home, they will treat it as an investment property.
The second mortgage will not affect the terms of the first mortgage. In case you decide to refinance your first mortgage at a later stage, you will first have to pay off your second mortgage to be eligible for refinancing.
Most of the lenders charge three-month interest penalty for early second mortgage repayment, but the terms differ from lender to lender. It is best to speak to your lender well in advance to ensure that you know about the penalties in case you are looking to close the second mortgage before it is due.