If you have accrued a fair amount of equity into your home – either by paying back your loan over a long period of time or by placing a high down payment initially – there’s a chance that you have heard the words “second mortgage.” A second mortgage is actually the use of a home’s accrued equity, the amount of home that you actually own compared to the home’s total value. This, no doubt about it, is a type of loan that needs to be repaid over time. This includes interest.
For homeowners who want to fund large expenses that will serve as investments in their futures, second mortgages can be a godsend. They put a large sum of money into your account right away, allowing you to access it for any number of reasons. This sounds great and all, but keep in mind that your home will be put up as collateral if you are unable to pay the principal and interest on your second mortgage as well as your first mortgage.
While this is certainly a risky move to make, it can definitely pay off. To learn more about what second mortgages in Canada entail, continue reading!
Types of Second Mortgages
There are two types of second mortgages available to Canadian homeowners:
- Home equity lines of credit (or HELOC)
- Lump sum home equity loans in form of private or second mortgages
In this section, we’ll detail the differences between the two forms that a second mortgage can take.
A HELOC essentially allows you to take out a large amount from your home’s equity, without forcing you to take out a certain amount all at once. Instead, you can withdraw from your line of credit as you would a credit card. Your lender will place a maximum amount that can be withdrawn.
Lump Sum Loan
Unlike a HELOC, which grants you the ability to withdraw funds as they are needed, a lump sum equity loan places a large amount of currency directly into your hands all at once. This is typically the “go-to” option for homeowners looking to take out a second mortgage in Canada.
Which One to Choose?
Both types of second mortgages put a lot of money in your account, but on different terms. If you are looking to make a large investment all at once, like paying off high-interest credit card debt, a lump sum equity payment is typically the preferred route. If you are planning to make renovations on your home but aren’t sure what the bottom line will end up being, a HELOC could grant you access to the money you need – and only when you need it.
Consider your needs very carefully before making this big decision. After all, second mortgages are types of loans that must be repaid in monthly installments and they do use your home as collateral. If you know that you are in a good position to access your home’s equity, confer with your lender or real estate attorney about which option is best for you.