The lower the amount of equity in the property, the higher the interest rate.Don Bayer, president of Monster Mortgage.ca, says that you should only take on a second mortgage if you are certain you can pay it off in a reasonably short period of time, like two or three years.
Home Equity Line of Credit (HELOC) A HELOC is a line of credit that is secured against your property, and it’s attractive if you don’t need all of the money at once.
It can be set up as a mortgage, but it’s usually in a second position after an existing mortgage.
In order to avoid that uncertainty, many lenders offer the option of locking in portions of their HELOC interest rate.
Since HELOCs are interest-only loans for a certain period of time, your minimum payment is going to be the amount of interest due each month on how much money you’ve borrowed If your loan still exists after that period of time, often 10 years, then your payments will increase to include the principal.
The lender can jack up the rate or even decide to make you repay the balance of your loan in full.
The likelihood of that happening is incredibly slim, but know that it is an option that lenders have should they choose to exercise it.
The product you choose depends on your reasons for acquiring the extra cash and the amount of equity that you’ve built in your home.
As with anything mortgage-related, you should read the fine print, especially if you decide to take advantage of one of these products in the middle of your mortgage term.
You also won’t have to pay any renewal fees for the life of HELOC.
An important note about HELOCs, though: the interest rate tends to be tied to the prime lending rate, but there’s nothing that says it has to be.
Technically, both a HELOC and a home equity loan are second mortgages, since they’re additional loans against your home behind your first mortgage, but a HELOC is treated more like a line of credit.