Are you a homeowner living and working in Canada? In this case, the term “second mortgage” may be familiar to you. Just as the first mortgage is given by a bank, the second one is secured by the house you own – this house has earned equity over time and this equity can be used to get the additional loan to use for your new projects.
While there are many Canadians who are currently using some type of this financial product, for example the Home Equity Line of Credit (also known as HELOC, read more), there are many more homeowners who are eligible for their second mortgage. However, they aren’t always aware of its benefits, how to obtain it, or, simply, how it works and what it can bring them.
The following advice, therefore, can shed some light on the topic and give you the available information for your own decision on the issue as it sums up the advantages of the second mortgage, the necessary qualification for obtaining it as well as the difference between different types of landers.
The advantages of the second mortgage
As it has already been mentioned, the home Equity Line of Credit is one type of the loans available to homeowners. It is offered by major banks, credit unions and private landers to borrowers with good credit history and decent income and it ensures access to their equity as they continue to pay off their first mortgage.
The HELOC functions very much like a credit card. Such a loan provides the borrower with a sum of money which he gradually repays with time. However, HELOC is not the only possibility for those homeowners who are looking into the possibilities of a second loan as there are other available products as well.
Also, not everyone who is looking for a loan is eligible for HELOC. As there is a number of private 2nd mortgage companies in Canada, these private landers offer their financial products to a large number of Canadians, even those whose credit history and lower income, typically in the rural areas of the country.
Taking up a second loan is a great way how to lower the first debt, which is typically contracted with a quite high interest. By gaining sources for paying off the first mortgage faster than expected, you can save money that you would otherwise spend on paying the interest.
The same goes for the holders of credit cards. While the interest rate on the credit card tend to be very high, the second mortgage can be used to pay off the credit card and thus save money on the interest.
The second loan can likewise be used as a down payment while applying for the classical loan on a house. The reason for this is to avoid paying the PMI – private mortgage insurance that is required for anyone who is not capable of paying the down payment, which may be up to 20% of the sum of the desired loan. Paying off the second mortgage is always less expensive than paying of the insurance.
Another great advantage of this product is the option of paying off only the interest, at least for a certain period of time. This might be crucial for the homeowners who do not wish to increase their monthly payments while enjoying the extra cash for either their payments as noted above, or for the renovation of their existing home. More info about how you can use the funds from the second mortgage.
How to qualify for the loan
As this product is fairly risky for the providers, the process of applicant’s approval is taken very seriously. There are four main documents that need to be provided to the underwriters of the lending companies for assessing the eligibility of the applicant for the second loan. These are the income verification, credit score, the list of equity and the assessment of the property.
Concerning the credit score, this information is obtained from the credit reporting agency. The agency will then provide the brokers with a credit history of the applicant. The credit history is an important indicator for calculation of an interest rate.
The verification of applicant’s income will be obtained through the bank and extracted from the last bank statements. While the income in itself is key here, overall performance of the account will be taken into consideration.
The list of equity is another of the important documents for submission. It is always good to have more equity, and the amount of equity can significantly influence the decision process of the mortgage company.
The last important information to provide the underwriters with is the appraisal of the applicant’s property. This must be done carefully so that no discrepancies between the real value of the property and the value disclosed by the applicant be found.
Bank or a private lender?
The typical interest rate on second mortgage is between four and twelve percent. For calculating the interest rate on any type of loan, you can try this calculator: https://www.mortgagecalculator.org/. This rather large interest gap outlines the main difference between the banks and credit unions and their product (which is, typically, a HELOC), and the private landers which offer second loan per se.
While the interest rate of private lenders tend to be twice, or ever three times higher, it is also much easier to obtain it as the minimum equity rate is only ten percent, instead of twenty-five percent required by banks and credit unions.