Tapping Into Home Equity Mortgages – Second Mortgages in Canada Versus Secured Lines of Credit

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Home equity mortgages or loans, whether in the form of a second mortgage or secured line of credit, are secondary mortgages. That is, when a home is sold home equity loans will rank after the first, or primary, mortgage which is on the property, and will be paid out only after the primary mortgage has been settled. When a mortgage or loan ranks lower in priority, the cost to the borrower in terms of the interest rate will (except in times of wildly fluctuating interest rates) be higher. As at least the first mortgage on the property will be paid off before a second mortgage, creditors factor in the added risk that a home’s value may decrease in value, leaving them holding the bag if there is not enough equity remaining in the property to cover all mortgages and liens on the property. Accordingly, the interest costs on second mortgages will usually be higher – sometimes, substantially higher – than the borrowing costs for a first mortgage.Second Mortgages versus Secured Lines of CreditSecond mortgages and secured lines of credit are both, technically speaking, home equity loans. That is, both types of instrument are secured against real property. The equity represents the difference between what a property is worth were it to be sold on the open market, and all other loan instruments, mortgages or liens that are secured against the property (and which are typically registered on the property’s title) are paid off. The primary differences between second mortgages and secured lines of credit are in the timing and methods of how the money is borrowed, and how the loan under the mortgage or line of credit is paid back.A second mortgage is – just as the name implies – a mortgage that in virtually all respects is like the primary mortgage a homeowner uses to purchase his or her home. Although the amount under a second mortgage will typically be less than that for a first mortgage and will command a higher interest rate as it ranks second in priority on title, in most other aspects the two instruments are virtually the same. Most usually, a second mortgage will be paid out in a lump sum to the borrower, and just like a primary mortgage, will have a fixed or variable interest rate as well as a defined amortization period – typically from five to thirty years depending on the size of the principal borrowed and the homeowner’s circumstances. Just like a first mortgage regular payments – monthly, bi-monthly or weekly – will be scheduled.In contrast, a secured line of credit acts much like a credit card, although the balance of the outstanding loan will be secured against a home or other real property. Because this is a secured line of credit – unlike an unsecured credit card loan – secured lines of credit come with substantially lower interest rates than your typical, non-secured credit card. Like a credit card, there will be a minimum monthly payment and a fixed limit on how much credit is available. In contrast to a second mortgage, cash is drawn out from a secured line of credit in tranches, or on an as needed basis. Provisions for repaying some or all of one’s secured line of credit are usually quite liberal, unlike a second mortgage which will typically have a set amount (15% is typical) that can be paid off, over and above regular payments, to effectively shorten the amortization period and save borrowing cost.Uses for Home Equity LoansConsumers access home equity loans for a variety of reasons. Typical uses for home equity loans include loans made for major home renovations, loans for large consumer purchases such as a boat or trailer and debt consolidation, although home equity loans can be accessed for a wide range of other uses – such as paying for a child’s education, financing a wedding or funeral, or increasingly using built up home equity for business and financial investment purposes.Interest rates and loan terms will vary significantly depending upon the specific type, size and details of the second mortgage or secured line of credit one is negotiating, as well as the borrower’s circumstances and the property the loan will be secured against. Talking to an experienced mortgage broker regarding your particular circumstances and needs is highly recommended when considering whether to tap into your home’s built up equity, Comparison shopping utilizing a broker’s services and expertise will help you determine the financial instrument that best fits your needs and has the most generous terms.