A second mortgage is an additional mortgage that you have on your home.
A second mortgage is often used to extend financing terms, allowing borrowers to out down less on a home. It can also be opened after a first mortgage transaction is closed, as a source for additional funds.
Just like any other loan type, opting for a second mortgage has its pros and cons.
Second mortgage Pros:
Monthly payments are typically pretty low relative to the first mortgage.
Second mortgages are offered in both adjustable and fixed-rate options. You can choose which option will work best for you.
Homeowners can break up the total loan amount into two separate loans called a combo loan.
It may help you get a lower interest rate if you’re in jumbo loan territory.
It can be opened as a home equity line of credit. You can get access to extra funds when you need it most. Getting a second mortgage provides quick access to cash with favourable interest rates.
What are the cons associated with a second mortgage?
Once approved for a second mortgage, it may be increasingly difficult to get any additional financing.
Interest rates on second mortgages are typically quite high compared to first mortgages. So you need to have a clear financial plan in place for how you will be able to afford to repay the loan.
Many of them are tied to the prime interest rate, which means that instalments will fluctuate with the prime lending rate.
There may be additional fees that apply, such as an early closure fee.
It can potentially extend the amount of time it takes to pay off your first mortgage.
It may be harder to qualify for a second mortgage, especially if you have a less-than-stellar credit record.