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When Does a Second Mortgage Make Sense?

Is a second mortgage the right choice for you?

If you’ve been wondering the answer, here’s how to tell.

First off, let’s define what a second mortgage is.

When you first buy your home, you take out a purchase loan – your first mortgage. This is typically secured by a lien on your home.

A second mortgage is like taking out another purchase loan. It also uses your home as collateral. A second mortgage taps into your available home equity.

It’s typically a one-time loan paid in a lump sum and repaid over fixed monthly payments.

It’s different from a home equity loan, or a home equity line of credit (HELOC).

Common uses:

  • Home improvements, especially if you’re planning to sell your home soon (the idea is you can repay the second mortgage by the increase in your home’s value).
  • Debt consolidation. A second mortgage can come with lower interest rates and costs than carrying high-interest debt, like credit cards.
  • Funding education, like paying for university or college. The idea is that you’re paying for a degree that will earn you a higher wage, so you can pay back the loan with the extra income.

Advantages of a second mortgage:

  • Higher loan amount

You can borrow a significant amount with a second mortgage – perhaps even up to 80% of your home’s value, depending on your equity and lender.

  • Lower interest rates

Compared to other types of debt, like credit cards or unsecured personal loans, a second mortgage can come with lower interest rates. This can be a good way to consolidate high-interest debt into one lower monthly payment.

Disadvantages:

  • Higher risk of default

If you are still paying off your first mortgage, you now have two mortgage payments to make each month, so you need to be sure you can repay.

If you can’t make your second mortgage payments, your home could be on the line. And, typically, if you stop making payments, your second mortgage lender won’t get paid until the first mortgage lender gets their money.

  • Higher closing costs

Depending on the lender, a second mortgage can come with more expensive closing costs than a HELOC or home equity loan. You might need to pay for a credit check, appraisal, lawyer fees, and more.

  • Higher interest costs

While second mortgage interest rates are typically lower than unsecured personal debts, they’re not quite as low as your first mortgage, or even a home equity loan or HELOC in some case.

It might be a good idea to consider a second mortgage if:

  • You have a lot of equity available in your home.
  • You need to consolidate debt.
  • You have a long-term plan for paying it off.

If you’re not sure if a second mortgage is right for you, Prudent Mortgage Corp can help you decide. We offer first mortgages, second mortgages, third mortgages, and more. We also offer alternative home equity products, including a home equity personal loan.

Contact us today for a free consultation. Call 1-888-852-7647 or visit www.prudentmortgage.ca.

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