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3 Things You Should Know About Private Second Mortgages

A person holding their credit card while using their laptop

A second mortgage is one that’s secured against your home, treating it as collateral. It’s called a second loan because it’s second in the order of repayment. Typically, the providers of the mortgage you use to purchase your home (first mortgage) are entitled to repayment first if your home is foreclosed.

Second mortgages are very common in Canada. They enable people to leverage their home’s increasing equity for other projects. Equity refers to the difference between your home’s market value and the claims held against it. As you pay off your mortgage (a claim on your home), your equity improves and the possible size of a second mortgage increases. Here are some things you should know about second mortgages.

Different Types

There are two different types of second mortgages: lines of credit and lump sums. Lump sum mortgages provide, as the name suggests, a lump sum of money that can be used for whatever purpose the recipient wishes. These loans are amortized, so you’ll be expected to make regular monthly payments of the loan amount and interest.

Home equity lines of credit represent a pool of money from which you can borrow as needed. This differs from a lump sum payment where you don’t need nor are required to borrow. You can borrow until you reach your credit limit, much like you do with a credit card.

Uses

A person signing a contract to get a second mortgage

There are two common uses for second mortgages: home upgrades and paying off high-interest debt. Second mortgages usually have lower interest rates than credit cards. Using a second mortgage to service debts with higher interests effectively reduces the interest rate on your debts. Besides that, the money can also be reinvested into your house to further boost equity.

The Home as Collateral

Securing a loan against your home has some benefits and drawbacks. A major benefit is that you’ll almost always have a lower interest rate, since your loan is less risky than loans based just on creditworthiness. A major drawback is that this means if you default on your loan, the lender can foreclose your home.

If you’re struggling with your credit score, getting a second mortgage from your bank probably isn’t possible. Fortunately, there are second mortgage lender and alternative mortgage lenders available to you. Contact us at Amansad Direct Lending Group for private home mortgage lenders in Edmonton, Canada. If everything checks out, we’ll give you your second mortgage.

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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