Obtaining a second mortgage can be confusing. You’ve already been through the jargon and process of getting your first mortgage, so many of these terms and conditions are likely already familiar to you. However, getting a second mortgage is not the same process as obtaining your first one. There are numerous differences that you should understand before you even consider going to a lender.
Common FAQ About Second Mortgages
Q: What is a mortgage?
A: A mortgage is a type of loan that a homeowner may take out against the equity of their home, using that home as collateral.
Q: What is equity?
A: Over time and as you make more payments toward the principal on your initial mortgage, your home accumulates more equity. Equity refers to how much of your home you actually own, i.e. how much of your mortgage loan’s principal you have paid off.
Q: Why do people get second mortgages?
A: Second mortgages grant homeowners access to a large sum of money, making all kinds of large financial investments possible. Many homeowners with second mortgages spend this money on higher education or home improvements, which can improve the overall financial standing of the individual. It is also common to take out a second mortgage to pay for home improvement, especially if they plan to sell the house later. Individuals with a fair amount of unsecured debt may also take out a second mortgage for the purpose of consolidating their existing debts.
Q: Are there different types of second mortgages?
A: Yes. The two kinds of second mortgages in Ontario, lump sum loans and home equity lines of credit (or HELOC).
Q: What is a lump sum second mortgage loan?
A: Lump sum loans are most commonly seen among homeowners who paid less than 20% down payment on their initial mortgages or those who have poorer credit. With this type of loan, the homeowner is given a large, one-time payment of their loan amount.
Q: What is a home equity line of credit (HELOC)?
A: Those who have conventional mortgages – wherein they have paid a minimum of 20% of the home’s total value as a down payment – and those with improved credit often acquire a home equity line of credit. This is still a loan but is one that homeowners may access at their choosing. At no point is the homeowner obligated to withdraw money at any time.
Q: What is the interest rate like on a second mortgage?
A: While the interest rate on a second mortgage is typically higher than the interest rate on an initial mortgage, this rate is often less than the interest rates of many credit cards and loans from other institutions.
Q: What do I need to qualify for a second mortgage?
A: Your credit report, employment history, debt-to-income ratio and existing equity on your home will be considered when you apply for a second mortgage. The better all of these factors look, the greater your likelihood of being approved.
Q: What happens if I default on my loan?
A: Because second mortgages use your home as collateral, foreclosure is a very real possibility should you default on your loan. This is why second mortgages are considered inherently risky.
Q: What costs are associated with getting a second mortgage?
A: Second mortgages can be quite expensive. They often require homeowners to pay for credit checks, appraisals, closing fees and any other fees that are associated with securing a mortgage.
Q: Do I need to get my second mortgage from the same place I got my first one?
A: No. You may seek out different lenders while shopping around for a second mortgage loan.
Q: Does my second mortgage impact my first mortgage?
A: Nothing will change about your first mortgage’s principal, interest rates or monthly payments.