Yes, we are all human, and all humans make mistakes. But those mistakes can be quite difficult to live with when they result in us losing tremendous sums of our hard-earned cash. In the world of real estate, we see these kinds of errors all too often. Even a small change can make a difference of several thousands of dollars. And, quite unfortunately, these errors can leave homeowners stuck in a hole that they cannot crawl out of. This, in the end, can spell out foreclosure.
Of course, you want to avoid this exact scenario from happening! Here are a few rules to keep in mind.
Mistake #1: Choosing the Wrong Form of a Second Mortgage
When you pursue a 2nd mortgage, you’ll have two options available to you:
- A home equity line of credit, which you can withdraw from as you see fit.
- A lump sum home equity loan, granting you the funds you need all at once.
Both second mortgage types require monthly repayment toward principal and interest. Aside from that, they are incredibly different in how they function.
Generally speaking, lump sum loans are ideal for most homeowners. This type of second mortgage not only lets you access the equity of your home, but it also offers a lower interest rate than many types of credit cards. Another benefit of this type of loan is that you can easily budget it into your existing finances, which cannot be said of a HELOC if you withdraw from it sporadically.
If you’re unsure as to whether a HELOC or lump sum loan is right for you, confer with your lender and/or your real estate attorney. They will best be able to assess your finances and the realities of your situation to help you come to a conclusion.
Mistake #2: Withdrawing Too Much
Just because you have a certain amount of equity available to you, that doesn’t mean that you should withdraw all of it. If you take out more than you can afford to repay, home foreclosure could quickly become a very realistic possibility. If you withdraw too much now, it could be quite difficult to refinance later if you choose to. It may also be difficult for you to obtain other forms of credit down the line, as well.
Mistake #3: Not Being Realistic
You might have pie-in-the-sky dreams about what you could use such a hefty sum for but pump the brakes and think for a second. This is a serious financial choice that you are making, and it’s one that can have lasting impact on your personal finances and your credit report. You need to be 100% confident that you can pay your debts on time each month, so assess your financial situation closely before you make this decision. Otherwise, foreclosure could be on the horizon.
Second mortgages can be an invaluable asset for Canadian homeowners, but it is not a move to take lightly. If your personal finances cannot confidently account for what you will be made to owe following the obtainment of a second mortgage, it’s best to avoid doing this for now while focusing on fixing your circumstances.