How Does a Second Mortgage (Secured Loan) Work?

A 2nd mortgage is a secured loan which is subordinate to the first mortgage against the same property. While there is no restriction on how you use the amount obtained from a second mortgage in Toronto, there are some common scenarios in which homeowners take out this type of loan, such as for funding home improvements, children’s education, debt consolidation, emergency expenses like medical bills, etc.

Types of Second Mortgages

There are two types of second mortgages – “Home Equity Loans” & “Home Equity Line Of Credit (HELOC)”. In a home equity loan, the amount of money you get is based on your home’s equity (difference b/w your home’s appraised value & the total amount you obtain from your mortgage). There is a fixed time period to pay back the loan amount in the form of monthly installments. A home equity line of credit, on the other hand works more like a credit card. This means you’ll have a certain credit limit which can be reused while you pay back the balance. This type of loan has a variable interest rate & no fixed term.

Qualifying For A 2nd Mortgage

To qualify for any type of 2nd mortgage in Toronto, you need to have more than 20% of equity in your house. Besides that, you should be able to make timely monthly payments on the mortgage without exceeding TDS (Total-Debt-Service). Even those with a low credit score are eligible for obtaining a 2nd mortgage, however at an interest rate higher than those with a better score. Lenders also consider factors like how long you have been working in your present company. This allows them to determine whether or not you would be able to keep up with the mortgage payments. Although the employment history of the borrower is vetted carefully, a recent period of unemployment would not disqualify you as lenders are familiar with the unstable job market. However, when you apply for a 2nd mortgage, you should have a job in hand. The fact that you are currently working will assure the lenders that you would be able to repay the loan amount. Typically, you have to show your employment history of last 6 months and sometimes more.

Key Considerations

Before applying for a second mortgage, be sure that you’ll be able repay the loan amount within the specified time frame. As taking out a 2nd mortgage means you will have to pay monthly installments for a fixed period of time, it is important that you thoroughly assess your monthly expenses & obligations beforehand. Also, take into account the risks involved in this long-term loan commitment as well as the costs associated with opening & maintaining the loan. Some of these expenses may include closing costs, home appraisal cost, & annual fees. To make sure you are not denied the loan, try to maintain a good credit score. There are many homeowners who often turn to a bad credit mortgage in Toronto because of their poor credit score.

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