Many people are confused between getting a second mortgage or a home equity loan. To help clear up things, here are some facts that you need to know:
What is a second mortgage? A second mortgage is the kind of loan you take out using the same property you used as collateral in your first mortgage. Usually, the amount that you can take out as your second mortgage will be smaller than the first loan.
If an unfortunate event happens and you cannot pay your mortgage and a foreclosure on your property is looking, the first lender will have the priority of getting paid before the lender of the second mortgage. As this is the case, expect a higher interest rate in your second mortgage as it will be a riskier investment for the lender.
What is a home equity loan? A home equity loan is a kind of second mortgage. The homeowner can borrow using the equity of their homes. The amount that can be loaned will depend on how much the house’s current value is and the mortgage balance of the first loan. Home equity loans come in two kinds – home equity lines of credit (HELOCs) or fixed-rate loans. HELOCs give the borrower a credit line where the borrower can get only the amount that he needs for the time being, while the fixed-rate provides the borrower with the amount in a lump sum.
To sum up their differences, here are the main differences between the two kinds of second mortgages:
Home equity loan:
- Cash is given in one go.
- Fixed monthly payment.
- Usually fixed interest rates.
- Interest charges apply to the total loan balance.
Home equity lines of credit (HELOCs)
- Cash can be released as needed up to the approved loan limit.
- Interest-only payments may be acceptable during the draw period.
- Rates vary.
- Pay the interest only on the money that has been drawn from the account.
Let us know how we can help you decide which option is best for what you need.