A second mortgage is a loan against your home, which is subordinate to the first loan secured against the same property. The term ‘second’ is prefixed to the name because if the loan goes default, then the first mortgage gets paid before the second mortgage. For this reason, second mortgages often carry higher rates of interest.
Second mortgages allow you to convert the equity in your home to liquid assets, which helps when you are going through a difficult financial phase. Homeowners also take out second loans for important stock market/real estate investments or home improvements. The prospect of using the equity in your home may look alluring, but you should take out the mortgage only if you can justify the investment. Here are a few basic tips that will guide you through the process of getting a second home loan.
Choose APR smartly
Before choosing APR on the loan amount, you should talk to various sources. Contact at least one bank, one dedicated lender, and one credit union to secure the best available rate. Do not choose the first lender that you come across. Despite foreclosures and a struggling economy, you can still get competitive rates. Request for quotes from online lenders as well. Try to negotiate a low rate of interest if you have a good credit score and sufficient home equity, to avoid making additional payments. A Toronto second mortgage broker would be an ideal asset to deal with in this matter.
Avoid default and prepayment penalties on your second mortgage
Be careful not to get locked in on a mortgage that comes with a prepayment penalty. You will have to fork up a significant amount as a penalty if you pay off the loan earlier than the specified term – usually 3 months interest if not more. So your plans of getting out of debt soon can come to a standstill if you are stuck with a prepayment penalty in the event you chose to pay the loan early. Also, avoid second mortgages that come with default penalties, which are imposed on missed or late payments. It is advisable to go for second mortgages that have flexible terms and agreements.
Do not include insurance policies
Some second mortgage loans come with various voluntary insurance packages. These can inflate your monthly repayment and make it difficult to continue making payments in the long run. Besides, you might already have those insurances covered under a different plan. In such a case, including these policies may become unnecessary. If you want to opt for insurance covers, you can get them done separately via an insurance broker, instead of securing it through a mortgage itself .
Avoid short term second mortgages under 6 months
When the lender offers a very short-term second mortgage, all the fees associated with lender and broker fee are due for the term of the loan. Always consider taking a one year term else, you will have to pay a large balance amount at the end of the loan term. While initial low payments may look attractive, you may struggle to make a big payment towards the end and even end up defaulting on the mortgage if you cannot find a suitable second mortgage lender at that time.
Taking out a second mortgage is an important financial decision, one which needs careful evaluation. Even though you are essentially using your home’s equity, you are also creating debt. So, a thorough number crunching is necessary before making any hasty decisions. Draft your monthly budget and see if your income can cover living expenses and monthly debt payments comfortably. Importantly, borrow from a reliable lender and choose a competitive second mortgage product.