Second Mortgage Loans Vs. Home Equity Loans, Which is for You?

The Differences in Loans, Layman Style

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.