A second mortgage in Toronto is much like the name suggests. It is an additional mortgage taken out on a property that already has an existing mortgage. Not only does the “second” refer to the order in which the mortgage was taken out, but also the order the lender’s money is returned. Let’s look at this in more detail.
The second mortgage is risky for the second mortgage lender, and for you as well (due to the higher mortgage rates). The rates are higher on your second mortgage to protect the rights of the second mortgage lender.
Your 2nd mortgage lender puts himself at risk of not being paid out in full (since they are in the second position). Knowing all of this, why would anyone take out 2nd mortgages?
If you have an existing first mortgage already, and you have a good credit score paired with at least 20% home equity that you own, then a home equity line of credit is the best option for you. This particular loan can be taken out with a bank.
However, if your credit score isn’t up to par, then you would need to opt for a loan from a private mortgage lender. The minimum home equity needed a private lender requires you to have would be anywhere from less than 10% up to 15%.
A second mortgage is a method for the individual to combine his or her debt or to help pay it off. You may be thinking about using your credit card, but believe it or not, the interest rate of a second mortgage is still lower than certain credit cards, or an unsecured line of credit.
Just because you take a second mortgage out on your house, it doesn’t mean your credit score will take a permanent hit. If you are using it to pay off debts and such, and payments are made on time or with time to spare, your credit score can actually rise.
This can also put you in a better position to qualify for a loan from a prime mortgage lender in the future. A better second mortgage lender could also possibly offer you better rates.
Other than consolidating debt, another reason why individuals would think about a second mortgage is to fund the unexpected. Accidents happen in life and so do emergencies. Not everyone has a large sum of money set aside for these circumstances.
In this case, second mortgages could come in handy. Another reason is to either build and expand upon your first home or to renovate or refurbish.
Taking a third mortgage is also an option after the second one, but that is for another article.
Just like with a job interview or any other loan, the second mortgage lender will need to take a look at a few factors. The four most common areas of documents you would need to provide would be: Your credit score, proof of income, your home equity, and the property itself.
Let’s break down each section and explain why your second mortgage lender would need to take a look at it.
Credit score – Your credit score is important not so much for securing the actual second mortgage loan, but for determining your mortgage rates. Your interest rates are affected by your credit score because the lower your score is, the higher your interest rates will be.
Proof of income – What better way to secure second mortgage rates than by giving your second mortgage lender in Toronto proof of income? Your job and salary are shown to prove to the second mortgage lender that you are able to pay back their loans in a timely manner.
This lowers their risk and gives them more peace of mind to hand you a significant sum for the loan.
Home equity – You need to have more equity stake in your home to increase the chances of securing second mortgages. Your first mortgage required less information since being first in the payment order is less risky for the mortgage lender.
The amount of down payment you put down for your home and the number of payments you have paid back to your first mortgage lender goes towards your home equity.
Property – The last part is the property itself. How much is it worth, how valuable could it possibly be on the market?
Second mortgages are riskier for lenders, and if it comes to the point where you need to sell the property to make payments, the more valuable the property is, the more chances the lender will be able to get back most of his money.
In general, a second mortgage lender will be putting emphasis on the equity you have in your property rather than your income or even your credit.
To make things clearer we’re going to do some math with you. Let’s say your home costs $500,000 and your first one was about $100,000. The combined amount of the first and second mortgage together in Toronto and many other cities in Canada can be as much as 80% (80% of the total value of your home, which is $500,000).
So depending on how much you took out for your first one, the amount of the second mortgages will vary depending on your individual circumstances.
We briefly talked about how a home equity line of credit could be better for some individuals. Let’s take a look at the differences between the two.
Proof of income – Your proof of income is required for both, but it’s more necessary for a home equity line of credit.
Credit score – The credit score to secure home equity loans are much higher, and even higher for better loan rates. For a better rate for the home equity loans, you need more than 740, but for second mortgages, it can sometimes even be less than 550.
Rates – Here you will see that the rates differ greatly. For HELC (home equity line of credit) you’re looking at 0.5%, but for second mortgages, the rates are a whopping 8-18%!
Payment – The payment also differs with both. For the HELC, you get a rolling credit and with second mortgages you need to renew it after the term is up.
- The number of lenders there are out there could allow you to shop around for better second mortgage loans.
- Most second mortgages are only 1 year per term and charge you interest only.
- If you qualify, you may be able to take out a large loan, up to 80% of your home value.
- The interest could still be lower than certain credit cards and credit card interest rates
- The interest rate is higher for these loans
- The penalties are higher if you default on your loan
- Amortization can last for a long time in some cases
A reverse mortgage is similar to a second mortgage and is a better option for seniors. It works like a second mortgage, but the homeowner can access the value (some of it) of the home.
Another benefit of a reverse mortgage that differentiates it from a second mortgage is the payment. There are no regular payments required until you move or sell your home.
A reverse mortgage is essentially a loan designed for seniors mainly . You are automatically eligible for the loan if you are over 55 years of age.
However, the interest may be even higher than a regular second mortgage since there are no set payment dates. You don’t even need to repay the amount until you move or sell your home. The loan can supply you with up to 55% of your home value in cash that is tax-free.
It’s sort of counter-intuitive in the fact that second mortgages can actually help with your credit score. Of course, this depends on how well you stick to payments. These mortgages are also easier to qualify for and you can revel in the convenience of interest-only payments. It can be quite useful even if you aren’t in a pinch for cash.
It’s like a tool homeowners can use to consolidate debt or to use their homes as collateral for other things. They are not difficult to obtain and offer Torontonians a lifeline in a time of need.
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