When an individual obtains a second mortgage, it means they are acquiring a subordinate mortgage while the original mortgage is still active. In the event of default, the funds obtained from selling the property would first be used to pay off the original mortgage. However, it is important to note that the second mortgage is repaid only after the first mortgage has been fully paid off. Due to this arrangement, the interest rate for the second mortgage is typically higher compared to the first mortgage.
A second mortgage in Saskatchewan is a subordinate mortgage that is obtained while the original mortgage is still active. In case of default, the proceeds from the property’s liquidation would first go towards paying off the original mortgage.
Since the second mortgage is repaid only after the first mortgage has been fully paid off, the interest rate for the second mortgage is typically higher. Additionally, the amount borrowed through the second mortgage is usually lower than that of the first mortgage.
How Second Mortgage Works?
When individuals purchase a home or property, they often take out a home loan from a lending institution, using the property as collateral. This initial loan is known as a first mortgage. The borrower is required to make monthly payments, which include a portion of the principal amount and interest. As time passes and the borrower consistently makes these payments, the value of the home tends to increase, resulting in home equity.
Home equity refers to the difference between the current market value of the home and the remaining mortgage payments. Homeowners may choose to borrow against their home equity to finance other projects or expenses. This loan, obtained while the first mortgage is still in place, is referred to as a second mortgage. The second mortgage is a lump-sum payment provided to the borrower at the start of the loan.
Different Types of Second Mortgages
There are two primary categories of getting a second mortgage loan in Saskatchewan that you can select from a home equity loan or a home equity line of credit (HELOC).
Home Equity Loan
A home equity loan enables you to receive a lump-sum payment based on the equity in your property. When you obtain a home equity loan, your second mortgage provider grants you a certain percentage of your equity in cash.
In return, the lender obtains a second lien on your property. You repay the loan in monthly installments with interest, similar to your original mortgage. The terms for most home equity loans typically range from 5 to 30 years, meaning that you repay them within that specified timeframe.
Home Equity Line of Credit
Home equity lines of credit, or HELOCs, do not provide you with a single lump sum of money. Instead, they function more like a credit card. Your lender approves you for a line of credit based on the amount of equity you possess in your home. Subsequently, you can borrow against the credit extended to you by the lender.
You may receive special checks or a credit card to facilitate your purchases. Similar to a credit card, HELOCs utilize a revolving balance. This feature allows you to use the funds on your credit line multiple times as long as you repay them.
For instance, if your lender approves you for a $10,000 HELOC, and you spend $5,000 and repay it, you can utilize the full $10,000 again in the future.
The Bottom Line: Is a Second Mortgage the Right Choice?
Although a second mortgage in Saskatchewan may appear to be the only option for paying off high-interest debts or funding significant renovation projects, it may not always be the most favorable financial decision.
Therefore, it is advisable to take the time to carefully consider all of your options before opting for a second mortgage instead of a refinance. To determine which option suits your situation better, it is recommended to consult with an expert today.
