Explaining How a Vancouver Second Mortgage Works – Ask Bruce Coleman, Vancouver Mortgage Broker
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Explaining How a Vancouver Second Mortgage Works
The two main reasons people invest their hard earned money into buying a home is because not only can you make money from the appreciation, but also from the equity that you build over time.
As you pay down your first mortgage and as your home appreciates the equity in your home and build quite rapidly.
What is Equity?
Basically, equity is simply what the market price of your home is worth minus the outstanding amount left on your existing first mortgage. For example, if your home is worth $500,000 and your first mortgage has been paid down to $300,000, then you have $200,000 worth of equity in your home.
This is also the profit you would realize if you sold your home right now.
A Second Mortgage is Based on Your Equity
The equity that you have built up is also something that you borrow against. When you use this equity to borrow money from the mortgage lender or some other lender, it is called a second mortgage.
How Much Can Your Borrow?
The amount on money that you can borrow on a second mortgage may vary from lender to lender but as a general rule of thumb, most lenders will allow you to borrow up to 80% worth of your equity.
Also, many lenders won’t consider you for second mortgage if you have less than 20% worth of equity accumulated in your home.
Types of Second Mortgages
There are two basic types of second mortgages and it’s important to know the difference.
The first type of second mortgage is simply what the name implies as it is known as a second mortgage. You essentially borrow a specific amount of the equity such as $25,000 and that is what the loan is structured upon.
The second type of mortgage is known as a “HELOC” which is an acronym for “Home Equity Line of Credit.” With this type of second mortgage you are extended a line of credit up to the amount you want to borrow. You have the option of taking out specific amounts as you need the money and when you need it.
A HELOC is especially useful if you are performing major home renovations such as re-doing the kitchen o using it for several home renovation projects.
How to Apply for a Second Mortgage
Basically, you apply for a second mortgage in the same manner that you applied for your first mortgage. You will go through the same type of application process and will have to pretty much submit the same type of paperwork, so you should update all your information beforehand.
You don’t necessarily have to use the same lender as the one with whom you have your first mortgage, but that is a normal practice used by many people. The lender knows you and may be more comfortable in giving you approval. However, you might consider using a mortgage broker to do some shopping around because you might find a better rate.
Things to Know about a Second Mortgage
The first thing you should know is that interest rates for second mortgages are almost always higher than what you are paying for your first mortgage. The second thing is that payments must always be made as fastidiously as you pay for your first mortgage.
So, it is vital you do some serious number crunching before you take out the loan. You are using your home as collateral and if you renege on your payments the lender would have the capacity to foreclose on your home.
