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If you’re like most homeowners today, you didn’t purchase your home in cash. Instead, you got a mortgage loan, made a down payment, and now you’re responsible for making monthly payments on your home until you’ve paid off your mortgage – usually in 15-30 years. Did you know, though, that you may be able to take out a second mortgage on your home to get a low-interest loan to consolidate other debts with higher interest rates?
Essentially, a second mortgage is any additional loan that a property owner takes out on a property that they’ve already mortgaged, and it’s a good move for a lot of homeowners who have outstanding credit card debt, auto loans, and/or other debt with higher interest rates than a home mortgage.
However, because there is already one mortgage on the property, approving this kind of loan is always a bit riskier for banks and mortgage lenders than approving a loan for a first mortgage. This is because, should you have financial difficulties and go into default on your mortgage, when the house is foreclosed the lender holding the first mortgage would be paid out before the lender holding the second mortgage.
For this reason, you should be aware that the interest rate on your second mortgage will typically be higher than the interest rate on your first mortgage. While this is most often the case, it is still a good decision for many homeowners, especially those with a fair amount of equity in their homes, as the interest rate will still generally be lower than those associated with credit cards and some other forms of debt.
If you have good credit and you have accrued at least 20% equity in your home, you will likely have the option to take out a home equity line of credit (HELOC). HELOCs are very attractive to homeowners who qualify because you will not be issued the line of credit as a full loan that you’ll immediately have to start paying back with interest. Instead, you’ll be issued a checkbook that you can use to make payments on home improvements and other expenses using your HELOC. Then you’ll only be responsible for making monthly minimum payments on what you’ve spent, not on the whole sum. Thus, you’ll potentially have less interest to pay back, as well.
If you have somewhat weak credit and/or you do not have a lot of equity built up, you can still get additional loan money and consolidate other debts by taking out a second mortgage through a trust company or through a private lender.
Generally speaking, if you have credit card debt or other debt with high interest rates, it makes sense to use a loan with a lower interest rate and more affordable monthly payments to pay off those debts. Then you will only have a single monthly payment, and you will not be accruing as much interest. So when does it make sense to get a second mortgage and when should you consider other options?
If you have a credit score of at least 650 and you have a minimum of 25% equity in your home, then you’ll likely qualify for a HELOC Canada, which you can generally get through a major bank (usually the one that holds your first mortgage). If your credit score is between 550 and 700, and you’ve built between 10% and 15% equity, you’ll likely qualify for a second mortgage with a trust company, and you’ll generally pay an estimated 15% interest. However, you may want to do some research into borrowing from a private mortgage lender Canada, as you may be able to get an interest rate at around 10%, even if you have a credit score that’s less than 600 and you own less than 10% equity in your home.
Consider your options for a second mortgage Canada and see if you can make your life simpler with consolidated debts and a lower interest rate.