Stuck in a rut? Perhaps a second mortgage is the answer to your fiscal setbacks.
For millions of Canadians, their biggest asset is their home – most homeowners today will even rely on their dwelling to fund their retirement, which is indeed a big risk for the future.
That said, life sometimes happens: the accumulation of debt, university tuition for the children, the primary breadwinner suffering an illness or the loss of a job. Many things can happen.
A second mortgage is becoming a popular financial tool for millions of Canadians who want to fund their retirement, go on a vacation or just pay some long overdue bills. A second mortgage essentially allows you to withdraw equity out of your home, similar to how a home equity line of credit (HELOC) works. It can serve as a great option for that massive monetary issue.
Here are five tips for homeowners seeking a second mortgage:
1. Is There an Easier Way Out?
Before you decide to take out a second mortgage to pay off your enormous debt load or to put your kid through college, you need to ask yourself: is there an easier way out?
Whether it is using some of your savings or selling your rarely used automobile, you must first peruse your options and find out if there is an alternative to the second mortgage.
Remember, applying for a second mortgage is a huge responsibility and an immense obligation.
2. You Will Pay Higher Interest Rates
Once you sit down with your mortgage lender, it is imperative to carefully read the terms and conditions of the second mortgage. One thing that you must be on the lookout for is the interest rates, something that will inevitably be higher than your original mortgage.
With the Bank of Canada (BOC) raising interest rates moving forward, the banks will charge you higher rates on all of your borrowing, including the second mortgage. So, you need to be careful of how much you borrow and how long the amortization period will be.
3. The Fees Will Kill You
The fees will not be as high as the interest rates, but they will still eat away at your wallet.
Indeed, the fees and charges – paperwork, applications, appraisals, consultations, etc. – will be exorbitant. You need to ensure that you have budgeted these fees, otherwise you will experience a dramatic shock when you need to put down money for them.
4. Be Sure to Time the Second Mortgage Correctly
As the old adage goes, timing is everything.
When you submit your application for a second mortgage, the timing of it will be imperative. This is because the amount will vary based on the equity in your home which stems from the property’s value since you took out the first mortgage.
In recent months, the housing market has somewhat cooled off, and some properties have seen their values decrease by as much as 20 percent. It isn’t too bad considering that some homes have surged 100 or 200 percent.
That said, you want the best bang for your buck so time is of the essence.
5. Lump Sum vs. Line of Credit
Lump sum or line of credit? That is the question.
A lump sum will be a one-time loan that offers a pile of money to use for whatever you wish. You repay the loan over a period of time with fixed monthly payments, which includes interest.
A line of credit is a pool of money that you can withdraw from. You don’t need to utilize all of the funds, but you can borrow as many times as you wish until you hit the maximum.
Second mortgages are most popular among older homeowners because they may not have budgeted their retirement correctly or have decided to fund their grandson’s university.
Whatever the case, you need to peruse your options carefully and correctly, and then you need to ensure that you’re doing the right thing. It took you a long time to pay off your first mortgage; you don’t want to spend your remaining years paying off another mortgage.