One of the main advantages of owning your own home is that all your monthly payments go toward building up equity — your money is going into an asset that will grow in value over the years, rather than simply disappearing into your landlord’s pocket.
But you don’t need to sell your house in order to get access to this value: when you take out a second mortgage, you can use the value of your home as leverage to borrow at a favorable interest rate.
Here are the top three reasons to consider doing so.
1. Getting Rid of Credit Card Debt
It’s no secret that there is a major crisis of consumer debt in Canada and the United States right now. While debt levels were already high at the beginning of 2020 (and had been for some time), the coronavirus pandemic and attendant economic meltdown have meant left many people much worse off than they were a year ago.
The key advantage of getting a second mortgage to pay off high interest debt is that it saves you money in the long run: instead of paying huge amounts of money just to service your debt, you can borrow a lump sum at a much lower rate and use that to retire your most toxic debts.
Doing this in a timely way also helps to preserve your financial standing, so you don’t come out of the recession with your credit rating slashed.
2. Paying Off Student Loans
For at least two generations, student loans have been key to helping young people who wouldn’t otherwise be able to afford higher education attend school.
But federal student loans have a dirty little secret: though they don’t charge interest until after you graduate, once the interest kicks in, it can be quite high. In Canada, for example, funds released through the National Student Loans Service Centre are subject to a rate of 2.5% plus prime, meaning that you could be paying as much as 6-7% interest on a significant amount of money.
If you have outstanding student loans and own a house, get in touch with a mortgage broker to find out what kind of rates you can get on a second mortgage, and look into ways a lump sum payment ran retire your loans completely.
3. Financing Renovations
There is a lot to love about owning your own home, but one of the few downsides is that you are responsible for all maintenance and repairs.
For example, if your roof springs a leak, you’ll need to come up with the money to cover repairs immediately if you don’t want the problem to get worse. Replacing a roof can cost anywhere from $5,000 to $11,000 depending on the size of your home, and most people don’t have this kind of money sitting around in their bank account.
In cases such as this, taking out a second mortgage can be the fastest and easiest way to cover the expenses, and some mortgage brokers can even provide you with these funds within a couple of business days after the application is approved.
While a second mortgage can be an incredibly useful financial tool, it is worth bearing in mind that it is still a loan that needs to be repaid. Consolidating debt, retiring student loans, and financing essential repairs are all sensible uses for second mortgages because they leverage your assets to put you in an even better position, and are a strategic way of furthering your overall financial goals.