Taking out a second mortgage on your Pickering home may be
seen as risky, since a home is one of the biggest investments one makes. Being
educated on what a second mortgage is and how it works, its benefits, and costs
can help you choose the right mortgage type and lender. For Pickering
homeowners, second mortgages can be a boon if chosen carefully.
What Is a Second Mortgage
and How Can It Be Used
A second mortgage is a loan taken against the same home or
property on which a first mortgage is already in place. A second loan can only
be taken on the same property when there is at least 15% equity in the house.
Equity is the current value of the home minus the balance mortgage remaining on
the property. With the recent real estate boom across GTA, the value of
Pickering homes has also increased. Many homeowners are capitalizing on the
increase in equity of their home by taking out a second mortgage.
Homeowners may take out a second mortgage for a number of
reasons, including debt consolidation, home repairs, investments, or a child’s
education. Generally, the interest rates on a second mortgage are lower than credit
card loans, making it an attractive option when a large sum of money is needed.
Choosing a Lender
Just like a first mortgage, homeowners should shop for the
best rate and assess if there are any hidden costs associated with the second
mortgage. Second mortgage interest rates are generally higher than first
mortgage rates. In case of a default, the first mortgage gets paid off first.
This makes second mortgages riskier for lenders. Your primary lender may be
offering the most suitable rate and product type that meets your requirements.
If that is the case, you have gotten a good deal. By getting a second mortgage
from your primary lender you only have to make one monthly, low-interest
payment. However, by evaluating the rates offered by other lenders, you may be
able to get a better interest rate for more equity, with low processing fees
and closing costs.
Typically, lenders can process second mortgages from 80 –
90% of the loan-to-value (LTV). This means that if your house is worth
$500,000, then you can get a mortgage for up to $450,000. If your first
mortgage is $300,000, you can get a second mortgage of $150,000. Choose a
lender that can give you the maximum equity from your home that meets your
requirements, at the best interest rate and lowest associated costs.
Pickering homeowners need to be aware that
second mortgages also have closing costs. Home appraisal fee, processing fee,
legal fee, title search and insurance may be included in the closing costs. These
can be anywhere from 2 to 5% of the value of the second mortgage.
Chosen with care, second mortgages are an attractive option
for Pickering homeowners to use the equity in their homes, when large sums of
money is needed. Whether it is to pay off a high-interest debt or for major
home renovations, second mortgages offer more flexibility and lower interest
rates than most of the other credit products.