Confused by Second, Reverse, and Refinance Mortgages?
We Can Help!
Did you know the equity you’ve built up in your property can help you consolidate debt, renovate your home, or provide travel, education, or business cash? You have options when it comes to tapping into your home equity. To help you decide which is the right choice for you, we look at three common mortgage loan solutions.
Refinancing Your Mortgage
When you refinance your mortgage, what you’re really doing is paying off your mortgage loan and replacing it with a new one.
Most homeowners refinance to:
- secure a lower interest rate or shorter mortgage term,
- change their adjustable rate mortgage to a fixed rate mortgage (or vice versa), or
- access the equity in their home
Negotiating a lower interest rate on your mortgage can lower monthly payments and free up valuable funds. You may also be able to take advantage of a cash-out refinance which lets you exchange your current mortgage for a larger loan, and take out the difference in cash.
If you’re planning to refinance your mortgage however, understand that refinancing before your mortgage term ends will likely result in prepayment charges. And if your existing mortgage is with a bank, your income and debts will be subject to the mortgage stress test.
In Canada, reverse mortgages like CHIP mortgages and PATH Home Plans are designed to provide homeowners 55-years-plus with a payment-free loan based on their home equity. The amount you can borrow depends on your age, the lender, and the current value of your home.
To qualify for a reverse mortgage, your home must be your primary residence and you must use the funds received to pay off any existing mortgages on it. Whatever money’s left over can be used as you wish.
Here’s how a reverse mortgage works in a nutshell:
- You won’t be required to make any payments until your loan is due – meaning when you move out of your home, sell it, or pass away
- You can choose to repay the loan plus interest any time, but you may incur an early payment fee
- Interest will continue to be charged and added to your original loan amount until the entire amount’s been paid off in full
Bear in mind that the longer you carry a reverse mortgage, the more interest accumulates, the bigger the amount owing becomes, and the more likely it is that your home equity (and size of your estate) will shrink.
Second Mortgage Loans
As an additional loan taken out on a property with an existing mortgage, second mortgages come in many forms. One of the most common is a home equity loan.
Home equity is the difference between:
Your home’s current value minus the amount you still owe on your mortgage
Assuming you qualify, lenders like banks and credit unions limit the amount you can borrow through a home equity loan to a maximum of 80% of your home’s appraised value (less any mortgage amount owing).
They’re also very careful to take your income and credit score into account when deciding whether to approve you or not.
Private mortgage lenders like Alpine Credits, on the other hand:
- offer an easy, 3-step online approval process,
- can usually approve your mortgage application within 24 hours or less, and
- approve homeowners based on their home equity and not on your income or credit score
And unlike most refinance and reverse mortgages, sourcing a second mortgage through Alpine Credits lets you access your home equity regardless of your age, income, or credit status.