A second mortgage simply refers to a mortgage taken against the equity of your home. This is something that every mortgage broker should help their clients understand. It is usually appalling to see how some Canadians struggle to get cash from costly avenues when they have enough equity in their homes that they could easily use to get a loan through second mortgages.
As a mortgage broker, it is imperative upon you to educate your clients on the importance and benefits of second mortgages so that they know about the various options they have and also help them solve some of the pressing financial problems they might be having.
To begin with, the interest rates are usually lower on second mortgages and this implies that they are a worthy consideration compared to a credit card or a personal loan. In addition to attracting low interest rates, they are easy to qualify for compared to other types of loans simply because the home is used as a collateral.
In Canada, there are two main types of loans behind second mortgages – home equity loans and HELOCs. With either of these loans, the applicants have the freedom to use the money as they wish. This simply means that they are not restricted on what they can do with the loan proceeds. As such, families can use the loans for remodeling projects, buying a new car, going for a vacation abroad or starting a business to increase their standards of living.
In fact, with the favorable second mortgage rates, a good number of people have used them to consolidate high interest credit card debts and worked their way out of debts. These are conveniences you will not get when you consider other types of loans.
Home Equity Loans or HELOCs?
While you talk to your clients about considering second mortgages with bad credit if that is their position, they will ask about which type they should go for – home equity loans or HELOCs. It is important that they clearly understand the difference between the two so that they know which option will work best for them. Though both loan types will allow you to make use of the equity you have in your home, they don’t operate in the same way.
With home equity loans, you borrow the money against the equity in your home, and you will receive the entire loan amount in a lump sum. The amount you get will be limited to your loan-to-value-ratio.
They come with fixed interest rates as well as fixed repayment plans. As such, they are predictable in the sense that you will know the amount of loan you qualify for, the amount of time you will need to pay it back, and the exact amount you will owe each month.
HELOCs on the other hand, work in the same way as credit cards. Instead of getting a lump sum, you will only borrow when you need the money and with this arrangement you will only repay for what you have borrowed.
However, the total amount you can borrow is limited to 75% of the home’s value. Such loans normally have a borrowing period and a repayment period between 6 months and 12 months (sometimes 24 months). Unlike home equity loans, the nature of a HELOC makes it difficult to predict the monthly repayment amounts which will usually vary from one month to another.