What Should You Be Using Your Second Mortgage For?
posted in Mortgage News
While paying off a high-interest consumer loan, or financing home improvements with the money from a second mortgage, is a worthwhile and sound idea, there is a better way to use that money: make a down payment on a rental property.
If you’ve got a second mortgage and are looking for the ideal way to invest your money, then making a down payment on a rental property could prove advantageous, and here’s why:
- If interested in buying a rental property, you can avoid saving for a down payment with a second mortgage
Before getting a rental property loan, you’ll need to meet the down payment requirements, which are pretty strict to say the least. For most homeowners, this can take a long time, but with a second mortgage, you can use the assets you already own, to acquire more assets. Note that the interest on that loan is tax-deductible, too.
- Your second mortgage can help you avoid PMI
More commonly known as Canadian Mortgage and Housing Corporation (CMCH) fees, Private Mortgage Insurance (PMI), is mandatory on down payments of less than 20% for rental properties. With a second mortgage however, you can avoid PMI altogether, which is sometimes as high as 4% of the property’s value.
- With a second mortgage, you can avail lower interest rates
With your primary residence serving as the collateral for your mortgage loan, lenders are safe in the knowledge that they can take possession of it in case of default, and as such, you’ll attract a lower interest rate with your second mortgage. This makes the loan more secure, and while the interest rate will be higher than that of your first mortgage, it will still be lower than the interest on a conventional rental property loan.
What are the types of home equity loans available to property investors?
There are two types of loans, both of which are detailed below:
- Fixed rate home equity loans
Repayable over a set period, fixed-rate home equity provides a lump-sum payment with a fixed interest rate, and usually runs for between 5 and 15 years. With a monthly payment plus interest rate that remains the same for the entire period, for those investing in a rental property and using a buy-and-hold strategy, this type of loan is great.
- Home equity line of credit (HELOC)
Putting a certain amount of money at the disposal of the borrower, this home equity loan enables them to borrow from it and repay it repeatedly throughout the duration of the loan. Monthly loan payments are dependent upon the amount drawn from the account, and the interest rate will vary according to market rates. For investors who flip houses, this is perhaps the most suitable type of loan.
If you’re seeking to invest in a rental property, then your second mortgage could help you achieve your goals far quicker. For more detailed mortgage advice and guidance, schedule a consultation with a trusted, local mortgage broker.