We checked in with Tuli Parubets, a local mortgage broker and asked her to explain exactly what second mortgages refer to and what the advantages and disadvantages of taking out a second mortgage can be. Here's what she had to say.
One of the biggest benefits to purchasing your own home is the ability to build equity in your property. This equity can come in handy down the line for refinancing, renovations, or taking out additional loans - such as a second mortgage.
A second mortgage refers to an additional or secondary loan taken out on a property for which you already have a mortgage. Some advantages include the ability to access a large loan sum, better interest rates than a credit card and the ability to use the funds how you see fit. However, keep in mind interest rates are typically higher on a second mortgage versus refinancing and can add additional cash flow tension to your monthly bills. Talk to a mortgage professional today to determine if this is the best option for you!
What is a second mortgage?
First things first, a second mortgage refers to an additional or secondary loan taken out on a property for which you already have a mortgage. This is not the same as purchasing a second home or property and taking out a separate mortgage for that. A second mortgage is a very different product from a traditional mortgage as you are using your existing home equity to qualify for the loan and put up in case of default. Similar to a traditional mortgage, a second mortgage will also come with its own interest rate, monthly payments, set terms, closing costs and more.
Second mortgages versus refinancing
As both refinancing your existing mortgage and taking out a second mortgage can take advantage of existing home equity, it is a good idea to look at the differences between them.
Firstly, a refinance is typically only done when you're at the end of your current mortgage term so as to avoid any penalties with refinancing the mortgage. The purpose of refinancing is often to take advantage of a lower interest rate, change your mortgage terms or, in some cases, borrow against your home equity.
When you get a second mortgage, you are able to borrow a lump sum against the equity in your current home and can use that money for whatever purpose you see fit. You can even choose to borrow in installments through a credit line and refinance your second mortgage in the future.
Some key things to note when looking at a second mortgage or refinancing:
- If you have a favorable interest rate on your first mortgage, a second mortgage allows you to keep the lower rate on your primary loan, resulting in a lower blended rate.
- Refinancing resets the amortization schedule, which could extend the loan term. A second mortgage leaves the existing term intact, helping you stay on track with your overall financial goals.
- Second mortgages often come with more flexible terms, such as interest-only payments, fully open, or shorter term, which can suit your immediate needs.
What are the advantages of a second mortgage?
There are several advantages when it comes to taking out a second mortgage, including:
- Homeowners can access a significant portion of their home equity (typically 80%-85% LTV).
- Better interest rate than a credit card as they are a ‘secured’ form of debt.
- You can use the money however you see fit without any caveats.
- Allows you to access your home equity without breaking your existing mortgage and incurring penalty fees.
What are the disadvantages of a second mortgage?
As always, when it comes to taking out an additional loan, there are a few things to consider:
- Interest rates tend to be higher on a second mortgage than refinancing your mortgage.
- Additional financial pressure from carrying a second loan and another set of monthly bills.
Before looking into any additional loans, such as a secondary mortgage (or even refinancing), be sure to reach out to me! Regardless of why you are considering a second mortgage, it is a good idea to get a review of your current financial situation and determine if this is the best solution before proceeding.
You can connect with Tuli by email: info@Tmfs.ca at 416.768.3620 or at 647.896.2233. Check Tuli out online at Torontomortgagefinancing.com or on Instagram at @torontomortgagefinancing.
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