Second Mortgage Loans vs. Home Equity Loans, which is for you? Its not always easy to tell. Its even harder with the confusing terms “second mortgage” and “home equity loan.” Folks new to the mortgage lending world usually mistake these two. Mainly because a second mortgage is a type of home equity loan. Basically however, home equity loan is used to describe a home equity line of credit, or HELOC. To take advantage of the equity that is built up in your home, you will need to decide if a HELOC or a true second mortgage is best for you. The most prominent difference between second mortgages and home equity loans is the maximum loan to value allowed, which can be as high as 125% of value.
A second mortgage pays out a fixed sum of money to be repaid on a set schedule, like an initial mortgage. Second mortgages are usually 15- to 30-year loans with a fixed rate of interest. A HELOC, however, is similar to a credit card, and it may possibly come with a credit card to make purchases. Interest is charged, just like a credit card purchase and the amount you can borrow is based on your credit standing and rating.
A home equity loan is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. you have to pay off the balance when you sell the house. A home equity loan allows you to borrow money using your home’s equity as collateral. A home equity loan is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements,weddings, credit card debt consolidation, college education or other large expenses.
There are two types of home equity debt: home equity loans and home equity lines of credit, also known as HELOCs. Both are sometimes referred to as second mortgages, because they are secured by your property, just like the original, or primary, mortgage.
Home equity loans are usually repaid in a shorter period than first mortgages. Most commonly, mortgages are set up in terms to be repaid over 30 years. Equity loans may also have a repayment period of 15 years, although it might be as short as five or as long as 30 years. They are available to homeowners in fixed rates, variable rates and with bad credit options. When considering a home equity loan it is beneficial to contact a loan specialist for specifics to your unique financial needs.
The most commonly asked question when considering these two loans is: Which is right for me? Close examination of your current financial needs will help determine which type of loan is right for you. If you need money for a one-time expense, such as building onto your home or paying for your daughters wedding, you would probably choose to go for the fixed-rate second mortgage. But if you will be needing a recurring amount of extra money, for something like tuition payments, you may prefer a HELOC. A line of credit allows you to borrow and use the money when the need comes along and, if you pay back the what you borrow quickly, you can save money much easier than using a second mortgage. You also need to consider your spending habits and your families lifestyles. If having another credit card in your pocket book would tempt you to make those impulse purchases, then you are not a good candidate for a HELOC.
Second mortgages will most often operate the same way as your first mortgage, lines of credit are different. They work with monthly payments and so you will need to review the fine print carefully. The best way to do that is to contact one of our loan specialists and have a specific quote on your personal circumstances. Try your hand at our mortgage calculator to get your own numbers rolling.