Tips For Getting A Second Mortgage
Shop around, and get quotes from at least three different sources. Be sure to include the following in your search:
Get prepared for the process by getting your documents ready. That will make the process much easier and less stressful.
Should I Take Out A Second
It is important to weigh up the pros and cons of taking out a second-charge mortgage or remortgaging if you are looking to use a property to raise money. Which is right for you depends on your circumstances.
Remortgaging when you are tied into a mortgage deal means you will incur an early-repayment charge. By taking a second-charge mortgage, you will avoid paying that penalty.
Although the interest rate on the additional loan may well be higher, it will be on a smaller amount and that has to be balanced against the cost of the ERC in working out which option is cheaper.
Remortgaging may allow you to secure a lower interest rate if your financial circumstances have improved, or if you find that the property is now worth more and your share of the equity has increased. But this is not always the case.
It may be, for example, that your has deteriorated since you took out the original loan and that you now face a higher interest rate instead.
How Borrowing On Home Equity Works
You may be able to borrow money secured against your home equity. Typically, interest rates on loans secured against home equity can be much lower than other types of loans.
Not all financial institutions offer home equity financing options. Ask your financial institution which financing options they offer.
You must go through an approval process before you can borrow against your home equity. If youre approved, your lender may deposit the full amount you borrow in your bank account at once.
You can borrow up to 80% of the appraised value of your home.
From that amount, you must deduct the following:
- the balance on your mortgage
- your total HELOC amount, if you have one
- any other loans secured against your home
Your lender may agree to refinance your home with the following options:
- a second mortgage
- a loan or line of credit secured with your home
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When To Take Out A Second Or Third Mortgage
There are many reasons to take out a 2nd or 3rd mortgage on an existing home. And when it comes to the low mortgage rates your InTrend Mortgage agent can negotiate on your behalf, in many cases it just makes sense.
Ask us about refinancing for:
- Consolidating debts
- Freeing up cash for your business
- Childrens education
- Paying off bad debt or mortgage arrears
- Bringing mortgage arrears up to date
- Halting a power of sale
How Could Scotiabank Help Me Unlock My Home Equity
At Scotiabank, we have the Scotia Total Equity ® Plan , which is a flexible borrowing plan tied to the equity in your home. STEP lets you choose from different kinds of Scotiabank credit products based on your needs, all with one easy application1. All it takes is one application to access all the benefits of STEP. You can borrow up to 80% of the value of your home, including up to 65% for lines of credit and other secured borrowing solutions. Speak to a Scotiabank advisor to learn more.
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Cons Of Getting A Second Mortgage
Second mortgages come with their own set of challenges. Here are four cons of getting a second mortgage for your home:
- Second mortgages usually have higher interest rates than refinancing: Because second mortgages take the second lien position in a foreclosure, lenders are taking a lot of risk in giving you a loan for the second place in your line of mortgages. So to compensate for that, they may demand higher interest rates than the first mortgage or a refinance.
- Second mortgages are financial disturbances: Especially if youre already struggling with the first mortgage, adding another mortgage can put lots of pressure on your finance, bite deep into your budget and possibly lead to defaulting in your primary mortgage or both.
- Second mortgages can take you back: Especially if youre close to paying off your current mortgage, a second mortgage might pull you right back into the debt track and put your home at stake if you default on your monthly payment.
- Second mortgages can be money traps: Because of the freedom of use of the loans from second mortgages, it is possible for you to spend it on projects that put you in more debt.
How A Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received. The interest is rolled into the loan balance so that the homeowner doesnt pay anything up front. The homeowner also keeps the title to the home. Over the loans life, the homeowners debt increases and home equity decreases.
As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the homes sale go to the lender to repay the reverse mortgages principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner or the homeowners estate . In some cases, the heirs may choose to pay off the mortgage so that they can keep the home.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the Internal Revenue Service considers the money to be a loan advance.
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Common Uses For A Second Mortgage
Some common uses of second mortgages are to pay for:
- Home improvements.
- College education expenses.
- Consolidation of higher-interest debt, such as credit cards.
Some borrowers use second mortgages to buy investment property. This can be risky, as a downturn in the housing market could lower the value of both properties.
How Do I Eliminate A Second Mortgage
You have a few options if you need to get out of a second mortgage. If you’ve just closed on a home equity loan or line of credit, you have three days to cancel the transaction without penalty. After that, your options are to pay off the loan, refinance your second mortgage into your first mortgage, or declare bankruptcy. The latter option is a last resort, and only certain circumstances with Chapter 7 and Chapter 13 bankruptcies will remove your obligation to pay the debt on a second mortgage. Be sure to discuss your options with a lawyer before you pursue bankruptcy.
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What If You Dont Qualify
If you dont qualify for any of these loans, what options remain for using home equity to fund your retirement? You could sell and downsize, or you could sell your home to your children or grandchildren to keep it in the family, perhaps even becoming their renter if you want to continue living in the home.
Homeowners’ Association And Condominium Owners’ Association Liens
Almost all HOAs and COAs have the power to place a lien on your property if you become delinquent in paying the fees or any special assessments. In most cases, the lien will automatically attach to your property. The lien will typically attach to the home as of:
- the date the association recorded its in the land records, or
- the date the fees and assessments became due.
However, the CC& Rs will often contain a provision stating that any association lien is subordinate to a first mortgage, even if the mortgage was recorded after the association’s lien was perfected. State law might also determine the priority of an HOA or COA lien. So, association liens are often junior to first-mortgage liens.
But a “super lien” is a category of lien that, under a state statute, is given a higher priority than other types of liens. When it comes to HOA and COA liens, a super lien refers to that portion of the lien that’s given higher priority than even the first-mortgage holder, placing the HOA or COA’s interest in front of a first mortgage.
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Second And Third Mortgages
Sometimes, a borrower needs two mortgage loans to buy a home. For example, an 80/20 loan is a pair of loans where the first loan covers 80% of the purchase price, and the second covers the remaining 20%. The mortgage securing the smaller amount will be recorded after the larger mortgage and is known as a “second mortgage.”
In some cases, the homeowner might also take out another mortgage or a home equity line of credit later on down the line. That mortgage would then be called a “third mortgage.”
Some Things To Consider Before Taking Out A Second Mortgage
Before you take out a second mortgage, check if you can get a further advance on your existing mortgage first and get advice from a suitably qualified adviser.
Theyll be able to help you find the loan best suited to your needs and financial situation.
Theyll have to follow the rules set out by the Financial Conduct Authority when dealing with you. These rules are designed to protect you.
If you choose not to get formal advice, you run the risk of taking out an unsuitable loan for your circumstances. If this happens, you might find it difficult to make a successful complaint.
When youre looking into a second mortgage, make sure you:
- shop around make sure you get the best rate by comparing lenders APRC , the duration of the loan and the total amount youd have to pay back
- find out the exact mortgage terms, fees, early repayment charges and rates of interest.
To see if a firm is regulated, check the Register on the Financial Conduct Authority Register website
Find out more in our guide Mortgage advice should you use a mortgage adviser?
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Why Take Out A Second
If you are looking to use your home to raise money, there are alternatives, such as remortgaging. This can work if the property is revalued and is now worth more than what you originally paid for it.
That could allow you to borrow more money on the back of your increased equity in your home. Or you could use it as leverage to get a cheaper interest rate.
However, a second-charge mortgage could come into its own if you want to:
- Keep your existing mortgage in place because you are, perhaps, on a discounted interest rate that you might not be able to match if you remortgage.
- Avoid a switch to a new mortgage triggering an early-repayment charge , which can be up to 5%of your mortgage balance.
- Raise money but remortgaging might not be sensible because your credit rating has gone down since taking out the original mortgage. Or there has been a change in your personal circumstances, such as becoming self-employed. Both could mean you are charged a higher interest rate as the lender will be taking on more risk. With a second mortgage, the extra interest will just be on the lower amount that you are looking to borrow.
However, think carefully before securing other debts in the short term. A second-charge mortgage could run for up to 25 years and you may end up paying more interest rates in the long term.
Because you are using your home as security, the interest rate is often cheaper than on an unsecured personal loan.
How Does Lien Stripping Work
You can only strip your second mortgage or other junior liens if the amount of the senior liens on the property exceeds the home’s market value. For example, if you have a first and a second mortgage on your house, your first mortgage balance must be more than what your house is worth before you can get rid of your second mortgage. If you have three mortgages, then you can strip both your second and third mortgages if your first mortgage is greater than the value of your house. However, if your house is worth more than your first mortgage alone but not more than the combined balance of your first and second mortgages, then you can only strip your third mortgage.
Example. Let’s say your house is worth $200,000 and you have a $250,000 first mortgage and a $50,000 second mortgage. In this case, since your first mortgage is greater than your house value, you can strip your second mortgage. Similarly, if you also had a third mortgage worth $30,000 in the above example, then you could get rid of that third mortgage as well. However, if your house was worth $275,000, then you have equity above and beyond your first mortgage so you cannot strip your second mortgage. But since the combined balance of your first and second mortgages is greater than $275,000, then you can still strip your third mortgage.
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Is It Better To Get A Home Equity Loan Or Refinance
The choice between a home equity loan and refinance depends on your financial circumstances.
A cash-out refinance replaces the first mortgage on your home with a new mortgage thats more than the current outstanding debt on your home. You then receive the difference between the existing mortgage and the new mortgage in a one-time lump sum. This option may be best for someone who has a high interest rate on a first mortgage and wants to take advantage of lower interest rates.
A home equity line of credit may be a better option in situations where the homeowner has ongoing financial needs, such as recurring tuition payments or a series of home update projects, and wants to keep drawing money as needed. Its also a better choice if you already have a good rate on your mortgage.
What Are Third Mortgages Used For
While first and second mortgages usually pay for the home itself, third mortgages are usually taken out in order to make home improvements or repairs, which help increase the value of the property. They can be used to make additions to the home, such as a swimming pool or a garage, or to renovate the kitchen, the bathrooms or other areas of the home.
Securing a third mortgage is difficult and you must keep in mind that you will most likely have to make monthly mortgage payments on all three of your mortgages at the same time each month, and that the third mortgage will come with a much higher interest rate than the other two.
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Discharging After Paying Off Your Mortgage
You, your lawyer or your notary can discharge your mortgage once you pay it off. You also need to make sure you dont have any amount owing on any related products. For example, you may have a home equity line of credit with your mortgage. If thats the case, you need to pay it off and close it before getting a mortgage discharge.
You may not want to discharge your mortgage if you plan on using your home as security for a loan or line of credit with the same lender. This includes options such as HELOCs.
How Much Can I Borrow On A Second Mortgage
The maximum second mortgage you can get depends on the amount of equity youve built up in your home .
A second mortgage allows you to use any equity you have in your property as security against another loan.
It means youll have two mortgages on your property.
Equity is the percentage of your property owned outright by you, which is the value of the home minus any mortgage owed on it. The amount a lender will allow you to borrow will vary. However, up to 75% of the equity in your property will give you an idea.
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How Does A Reverse Mortgage Work When You Die
Its important to have a plan to deal with your reverse mortgage loan after you die. Family members also need to understand their options for keeping the house, as well as their payment responsibilities. Repaying the loan can get complicated, depending on how much equity you have in your house and whether you want the house to stay in your family after your death.
What Is The 3rd Mortgage Qualification Process
Lenders will look at your credit history and income to see if you qualify for a third mortgage in Canada, with a focus on your loan-to-value ratio. The more equity you have in your home, the more likely you are to be approved for a 3rd mortgage.
To qualify, you must have a steady income and a good credit score, and you are more likely to be approved if the lender currently handles your second mortgage.
You must have over 20% equity in your property and be able to pay the monthly payments on your second mortgage without exceeding your Total Debt Service Ratio to qualify for a third mortgage .
Aside from your credit score, lenders will consider how long youve worked for one employer, which will provide them a sense of security and make it easier for you to qualify for a 3rd mortgage.
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