You already know that the purchase of a home is one of the largest investments that a person could make in their lives. What you might not know, however, is that this investment can turn around to work for you as an asset. The longer you are in your home and making payments toward your mortgage, the more you accumulate in home equity. This equity can then be withdrawn and used by you for a multitude of purposes. When you choose to make use of the funds available to you via home equity, this is called a second mortgage.

Just like your initial mortgage, a second mortgage is a type of loan. For homeowners looking to consolidate their debts or tackle large household expenses – like renovations – these loans can be a tremendous assistance to their goals. They don’t involve homeowners having to sell their homes to get the money that they need.

Really, this isn’t as complicated as it sounds. Continue reading to learn more about second mortgages in Canada.

What Does it Mean to Borrow Against Your Home’s Equity?

The term “equity” refers to how much of your home you actually own. The larger the down payment you make and the longer you are making payments on your home, the more equity you will accrue. This applies to your mortgage’s principal, not the interest. Your lender will determine how much equity you must have in order to withdraw from it, a condition that they will likely address with you when you take out your first mortgage.

Just like with first mortgages, second mortgages are loans that come with a principal and interest. Depending on the nature of your first mortgage, especially if you paid less than 20% as a down payment, your interest rate on your second mortgage will likely be steeper than the rate on your first. It is worth noting, however, that the interest rate on a second mortgage is still going to be lower than the rate attached to many types of credit cards. This is why so many homeowners use second mortgages to pay off high-interest credit card debt.

When you take out a second mortgage, you need to ensure that you can repay the balance on both your initial mortgage and this new loan. Your house will be used as collateral if you cannot pay, so taking this route can be quite risky. Because of the risk associated with this type of loan, it is ill-advised to use a second mortgage to pay for luxury or daily living expenses.

The benefits should outweigh the risks. One such circumstance is when you are planning to sell the home and need to make renovations that could drive up your asking price tremendously.

In Conclusion

The possibility of foreclosure in the event of default is a very real one, so you should act with caution when you take out a second mortgage. When you are capable of making the loan repayments on time and in full, however, these loans can provide a slew of benefits for ambitious homeowners looking to make large investments toward their futures.

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