What is a Second Mortgage - Should I Get One

So, you have heard a lot of people talking about second mortgages, but are yet to get a gist of what it exactly

means. Well, simply put, as the name suggests, a second mortgage is an additional loan against your home; it

gives you access to the equity in your home. For example, if your home is worth $200,000, and you have paid off

$100,000 (including the down payment and subsequent installments), you have $100,000 of equity in your home.

A second-mortgage lender takes into account this equity and offers you a loan.

Why do Homeowners Take It?

There are a number of reasons why people take out second mortgages; some do it to pay off their other high-

interest loans, such as credit cards, auto loans, while some want to use the money to fund a home renovation or

say, child’s education. Whatever the reasons may be, it is important that you consider the implications of taking

out a second mortgage. Like a conventional mortgage, the lender files a lien against your home, meaning that if

you default on your payments, you could end up losing your home.

Types

There are two types of second mortgages – home equity loans and line of credit. The former gives you a lump sum

amount (depending on the equity in your home), which you have to pay along with the interest in a stipulated

time. Line of credit on the other hand works more like a credit card; you have access to a certain amount of credit

limit, and you can draw on it anytime you want to, provided you do not exceed the maximum amount.

It is Another Debt

While the idea of capitalizing on your home’s equity is tempting, you need to understand that at the end of the

day, you are adding one more debt for which you will need to make monthly payments. Taking a second mortgage

also involves additional costs, such as the cost of appraising the property, processing fees, annual fees, etc. The

important thing that you need to keep in mind is that if you are not able to repay the loan, your home will be on

the line.

Average Interest Rates

For homeowners in Toronto who are looking forward to take a second mortgage, it might be worthwhile to know

that the interest rates are in the range of 10% to 15%. If you have considered all your alternatives and definitely

want to take it, remember to take the services of a well-known and credible lender.

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