It’s wise to prepare and be ready for the unexpected. Whether it’s an unplanned home repair or medical expense, it’s always good to know that you have a safety net in the case of an emergency. But what if you’re in need of more funds than you have saved? With the help of using a second mortgage you can access your home’s equity to provide you with the funding you may need. 

What’s a Second Mortgage?

A second mortgage refers to an additional loan taken out on a mortgaged property. When the homeowner makes payments on the second mortgage, they must also make the payments for their first mortgage. Second mortgages may also have higher interest rates and may incur appraisal, legal and other fees. 

Second mortgage vs refinancing

Note that a mortgage refinance differs from a second mortgage. Refinancing typically makes a better alternative to a second mortgage when interest rates are low. With this option, you’re basically bargaining your current mortgage to access your home equity

Using a second mortgage

The most common use for a second mortgage is to pay for high-interest debts, such as credit cards, tax arrears and other high interest loans. 

Second mortgages are also popular for funding home renovations, repairs and upgrades. Home improvement projects can add value to your home and help get a higher price should you decide to sell. Other uses for a second mortgage include: emergency funds, medical expenses, education fees and venture capital.

How to Qualify for a Second Mortgage?

A second mortgage has a few essential requirements:

1. Equity

As you pay off your primary loan balance over time, the portion of the loan you pay off is called equity. More equity means the higher your chances are of being qualified for a second mortgage. If you’re buying a house, a larger down payment will also decrease the risk that a lender takes on. 

2. Income

Lenders will verify that you have a sufficient source of income and are able to make payments on time. You’ll be required to show proof of income, an employment letter, pay stubs and bank statements.

3. Credit score

Your credit score determines your overall credit worthiness, meaning how likely you are to pay back your loan. Credit scores from 660 to 900 are generally considered good, very good or excellent and the higher the score can mean better interest rates. 

Is a Second Mortgage Right for You?

If you’re in need of a large sum of money, but don’t want to change your current mortgage terms, then a second mortgage may be the best choice for you. You may pay more in interest charges on a second mortgage, but you’re guaranteed to keep your first mortgage intact, as this isn’t always the case with refinancing. 

Mortgage brokers specialize in finding you the best mortgage products at competitive rates and work with you to tailor a mortgage solution that’s best suited for your individual needs. If you require assistance, we recommend working with an experienced financial professional who can help. Based just outside of the Greater Toronto Area, Daisy Raouph’s a mortgage broker and financial security advisor equipped with over 30 years of experience in mortgage and financial services. Consult Daisy today to get started!