Taking out a Second Mortgage or Home Equity Loan in Alberta
People take out second mortgages or home equity loans on their property for a variety of reasons. Sometimes they want to take out equity to send their kids off to college. Others want to buy a vacation home. Still others want to consolidate consumer debt at a much lower interest rate.
No matter what your rationale for adding another mortgage to your house, it’s important to work with the right lender – which means finding the right broker for your needs. Even if you have pristine credit, the different second mortgage options available to you in places such as Edmonton, Calgary and Banff can vary widely in terms of interest rate and closing costs and other fees.
One thing that second mortgage borrowers need to understand is that the interest rate on their new loan will be somewhat higher than their first mortgage. The reason for this is that the risk associated with a second mortgage is always higher. Let’s say you go into default and the home goes into a foreclosure sale. The proceeds from the sale have to pay the first mortgage before the second one can be satisfied, which means that the second lender may have to go after you for the difference.
Here’s an example. You buy a house for $600,000 and put $120,000 down, leaving a balance of $480,000. You pay on the house until the balance is $300,000 and then decide to take out a $200,000 second mortgage so that you can pay cash for a vacation home. If the property market has suffered and the appraisal value is only $550,000, there is a significant risk that the second lender would not be fully repaid if you went into default. Foreclosure sales do not commonly yield the full value of a home, so it’s likely that a foreclosure sale would yield less than the $500,000 balance owed ($300,000 for the first mortgage and $200,000 for the second), so you would have to pay a higher interest rate on that second note to justify the risk to the lender.
Home Equity Loans in Alberta Explained
The equity you have built up in your home really makes your dwelling into a large savings account. However, that money is tied up — you can’t make a withdrawal, like you can from a passbook savings account.
Here is how home equity loans work. You take out a loan against the equity that you have built up in your home, and you pay yourself back. How much can you take out? That depends on a few things if you are applying to a traditional type lender– your credit and income, of course, but also the amount of equity you have in your house. The current appraisal value of the home comes into play too. This can really work out for you if you are applying in an area where values have been going up since you took out your first mortgage because that increase in value can go right to your loan. If home values have dropped, though, that will reduce the amount for which you are qualified. When applying with semi-traditional or private lenders, the credit isn’t as important however the rates are also higher.
Some of our Alberta clients prefer the flexibility of a home equity line of credit (HELOC) instead of a home equity loan. If you know exactly how much you need to borrow, and you need it all at a specific time (as with the purchase of a vacation home or that huge fishing boat), then a loan probably makes more sense. If you know that you will need some money but aren’t sure when you’ll need it — or if you’ll need the maximum — then a HELOC might make more sense. A HELOC comes with a maximum amount — and a box of special checks or a credit card, depending on the lender. You get to take out what you need, when you need it, but you don’t pay for the credit that you don’t use, and you only pay interest on time between you use it and you pay it back. There are also some drawbacks with a this type of mortgage such as it being a collateral charge & demand loan limiting your ability to take our more if needed, or simply access equity from a different lending source.
At Amansad Financial, we have connections with a variety of lenders throughout the major Albertan cities as well as Lethbridge, Red Deer and other smaller municipalities. We work with lenders who only deal with customers who have excellent credit, and we work with lenders who are more willing to come up with creative private lending options to work with customers whose credit and income profiles are not appealing to banks but who nonetheless have the means to pay for a mortgage.
No matter what your reason for pursuing a second mortgage or home equity loan, chances are that we can find a lender that serves your needs at an interest rate that is competitive. Reach out to one of our second mortgage specialists today so we can put together a personalized package for your financing.