5 Guidelines You Need to Know Before Getting a Second Mortgage
The real estate markets in Toronto and Vancouver have somewhat cooled down, but the nation’s housing values are still at impressive levels. If you bought a home a decade ago, it is quite likely that your humble abode’s price-tag has surged at least 50 percent. Congratulations.
But have you heard of being house rich but cash poor? Well, that’s the situation that we’re in.
With interest rates starting to tick upwards, debt levels sitting at all-time highs and the cost of living only increasing, many Canadians are looking at taking out a second mortgage.
Is this right for you? It depends. You first need to know what a second mortgage is: it’s another mortgage, following your current mortgage that is secured by the same property, and you can select either a lump sum payment or a home equity line of credit, otherwise known as a HELOC.
Here are five things you need to know about getting a second mortgage:
1. You Must First Determine Your Credit Score
Before you apply for a second mortgage, it would be wise to first determine your credit score. If you have a lower-than-average credit rating then your chances of being approved for a second mortgage will drop – if you already have a mortgage, it doesn’t guarantee you’ll get another.
If you desperately want a second mortgage then you must do everything you can to give your credit score a shot in the arm: pay off your debt, pay your bills on time, don’t apply for new credit cards and don’t close down any credit accounts.
2. What Kind of a Second Mortgage Do You Want?
There are two primary kinds of second mortgages: a home equality of line of credit (HELOC), as we previously mentioned, and a home equity loan (a lump sum payment). The former allows borrowers to take out cash whenever they need with an interest rate, while the latter is a one-time payout with an interest rates.
It is up to you which financial product you want.
3. Search for the Best Rates – it May Not be Your Bank
A common mistake that homeowners and borrowers make is they often turn to their financial institution for their credit needs. Although this is a convenient decision to make, it often isn’t the most prudent one, and it will cost you plenty down the road.
You may need to look elsewhere to get the best rates for your second mortgage. A private brokerage firm, a different bank, a credit union or smaller financial institutions.
4. Always Negotiate Fees with Your Lender
This may be hard to achieve with one of the big five banks, but you can always attempt to negotiate fees with another lender. If it is a smaller firm then you have a better opportunity to discuss your fees and try to waive some of them, like closing costs and application fees.
5. Only Use Second Mortgages for Short-Term Needs
The most important thing to remember is that your second mortgage should only be for short-term needs and, if possible, emergencies.
In other words, you shouldn’t take out a second mortgage to buy new furniture for your home, purchase a new television or take an expensive vacation; your second mortgage should be for health emergencies, a job loss or perhaps retirement needs.If you’re using a second mortgage for a shopping spree, then you’ll be in trouble in no time.
A second mortgage serves as a tremendous and helpful monetary tool for the unexpected occurrences in your life. They can help pay for repairs, remodel your home or cover the cost of an expensive surgery. Heck, even seniors use second mortgages to cover their retirement.The second mortgage should always serve as a last resort. When you’re in the market for one, do your research, ask plenty of questions and try to get the best rates.