Second Mortgage And Home Equity Loan

If you are looking to free up some cash to finance home renovations, send your children to school, or fund a down payment on a new property, you might consider using the equity in your home.

As a homeowner, you start building equity by making your regular mortgage payments. Over time, as you pay down your mortgage, you begin building equity. Additionally, you can build equity by making home improvements that increase the value of your property. Equity can also increase over time as your property value rises. Home equity can be an incredible resource if you’re looking to free up cash for a particular project or as a way to consolidate debt.

You can use a simple calculation to determine the amount of equity you’ve built in your home. Take the market value of your home minus the amount you have left on your mortgage and any other loans you have secured against your home.

A second mortgage can come in the form of a home equity term loan or a home equity line of credit (HELOC). This article will explain second mortgages, home equity loans, and home equity lines of credit, so you can determine which one is right for you based on your financial situation and needs.

What is a second mortgage?

A second mortgage is a secured loan (like a home equity loan or home equity line of credit) that you take out using the equity you’ve accumulated in your home without having to refinance your existing mortgage. It’s called a “second” mortgage because the mortgage securing the loan is registered second in priority after your first mortgage. If you are unable to make your monthly payments and your home goes into foreclosure and sold, your original mortgage is paid off first, and your second loan is paid off second from the proceeds of the sale. It’s important to know that you may need the consent of the lender under your first mortgage to register a second mortgage on title to your property.

What is a home equity loan?

A home equity loan is a common type of loan secured by a second mortgage. A home equity loan is a term loan that allows homeowners to borrow money against the equity they’ve built in their home. The amount of money a borrower can take on depends on the amount of equity that has been built in the home. With a home equity loan, you can borrow up to 80% of the appraised value of your home, minus the balance of your first mortgage.

Home equity loans can be a useful option for homeowners looking to free up cash because they typically have lower interest rates than on other types of unsecured loans. A home equity loan is typically paid out in a one-time lump sum payment and has to be repaid over a specified term.  At the end of the term, the home equity loan needs to be repaid, unless it is renewed for another term.

A home equity loan is one example of a financial product that you can use as a second mortgage. A HELOC is another common example.

What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a form of revolving credit. With a revolving line of credit, you can borrow money whenever you need it up to your predefined credit limit.

A HELOC usually features a variable interest rate that is tied to the lender’s prime rate. A variable-rate means your rate can fluctuate over time. With a HELOC you have access to the money whenever you need it and you only pay interest on the amount of money that you use. Your payments will vary based on how much money you currently owe on the line of credit and the applicable interest rate.

Currently, the credit limit for a HELOC can’t exceed 65% of the home’s lending value.

How could Scotiabank help me unlock my home equity?

At Scotiabank, we have the Scotia Total Equity ® Plan (STEP), which is a flexible borrowing plan tied to the equity in your home. STEP lets you choose from different kinds of Scotiabank credit products (like mortgages and line of credits) based on your needs, all with one easy application1. All it takes is one application to access all the benefits of STEP. You can initially borrow up to 80% of the value of your home, including up to 65% for lines of credit products.2 Speak to a Scotiabank advisor to learn more.

Why you might use a second mortgage

A second mortgage provides a lot of flexibility when it comes to how you can use the money. Some common reasons that Canadians might use a second mortgage include:

  • Debt consolidation
  • Home renovations
  • Fund a child’s post-secondary education
  • Financing living costs in an emergency
Pros and cons of using home equity loans and HELOCS 

When making important financial decisions, like whether or not to take on a second home mortgage, it’s important that you carefully consider the pros and cons.

Pros of a home equity loan as a second mortgage include:

  • Access – depending on how much equity you have built in your home, you may be able to access a large amount of money
  • Flexibility – you can use a second mortgage for many purposes from home renovations to debt consolidation
  • Fixed repayment periods – it can be easier to budget for your payment and manage your debt load when you have a fixed repayment schedule
  • Availability – there are many second mortgage lenders available. You can choose to go with a traditional financial institution or a private lender

Cons of a home equity loan as a second mortgage include:

  •  Higher interest rates – rates can be higher than those on your principal mortgage due to the increased risk taken on by the lender
  • Additional debt – when you take on a second mortgage you are increasing your debt and your monthly payments. If you aren’t careful in keeping up with payments, you can accumulate debt.
  • Loan default – if you are unable to make your payments the lender can claim and sell your home

Pros of a HELOC as a second mortgage include:

  • Flexibility – you can use a HELOC for almost anything including financing your children’s education, paying off a higher loan balance, or possibly even refinancing your first mortgage.
  • Interest – you only pay interest on the amount of money that you use.
  • Easy access – the money is there and available whenever you need it. You don’t have to apply for a new loan each time you need money.
  • Lower interest rate– you may pay lower interest than with an unsecured loan.

Cons of a HELOC as a second mortgage:

  • Variable interest rate – It could go up at any period depending on your lender’s prime interest rate potentially causing your loan payments to rise.
  • Easier to accumulate debt – Because the HELOC is so flexible in terms of how it can be used, it can be easy to accumulate debt if you are not careful about how you use it. Similar to a credit card, or personal loans, you need to use it carefully to make sure you aren’t facing too much debt.
  • Loan default- If you default on your loan payments, your home could go into foreclosure.

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