If you’re considering a second mortgage, it’s important to understand the details surrounding this option so that you can be sure that it’s right for you.
In short, a second mortgage is an additional loan that is taken out for a property that already has an existing loan because it is already mortgaged. Lenders view this type of loan is risky, which is why the rates that accompany second mortgages tend to be higher than the rates offered for the original mortgage. This is a way of compensating the additional risk they are taking because the lender is not in the first but second position when it comes to your property’s title, meaning if the homeowner cannot make their payments, the first lender will be paid out, putting the second lender in a sticky situation.
There are different ways to go about this process and a common form is a home equity line of credit, which is a suitable option for those who have an existing mortgage, good credit and more than 20% equity in the home. If this criterion cannot be met and the homeowner has poor credit or not enough equity in their home, this option will not be available and the homeowner will have to proceed with a private lender.
Most people who are interested in a second mortgage consider this option because it allows them to consolidate debt. While it comes with a higher interest rate when compared to the first mortgage, the rate is usually lower than what is offered through credit cards or a line of credit, making it a decent option to choose. If your goal is to use a second mortgage to consolidate debt, it will actually help improve your credit score and you may even qualify for a mortgage through a prime lender sooner, so if you have financial commitments you need to meet in a specific time frame, a second mortgage is definitely worth considering.
Another thing to consider while comparing interest on Second Mortgages with credit card interest rate is the way interest gets compounded. While most of the second mortgages compound monthly, the interest rate on credit cards gets compounded daily so the borrowers end up paying more interest on credit cards. Credit card debts get reported to Equifax / Trans-union every month while Most Second Mortgage debt not get reported on Equifax / Trans- a union which in turn helps borrowers improve their credit rating.
Lenders look at things like equity, income, credit score and property to determine whether or not you qualify for a second mortgage. The more equity you have in your home, the higher your chances for approval will be. Your income will be reviewed because lenders need to be certain that you will be able to make your payments on time, which will only be possible if the candidate has a dependable source of income. Your credit score will affect the interest rate you are offered and the higher your score, the lower your interest rates will be, so do everything in your power to increase it before applying for a second mortgage.
Dhugga Mortgages in Brampton can help answer all of your mortgage-related questions and take care of your mortgage needs. Whether you need a private mortgage or want to refinance the one you currently have their brokers can help, so give them a call today!