Most people get confused when referring to home equity loans and second mortgages because some websites may use the terms interchangeably, so how are they different?
A second mortgage is actually a type of home equity loan. When mortgage professionals bring up the term home equity loan, they are usually referring to a HELOC or a home equity line of credit. Both loans allow you to use the equity you’ve built up in your home to your advantage but subtle differences may make one better than the other for your needs.
To make it easier for you to pick whether a second mortgage or a home equity loan would be better for you, we’ll have to touch up on their basics so you can have a clearer understanding of each loan type.
A Look into HELOCs
An easy way to describe a HELOC is to compare it to a credit card. Your current equity is a determining factor in setting your credit limit but just like a credit card, you can use a HELOC for both big and small purchases as long as you do not exceed your limit. Interest is charged just like a credit card but only to the amount you’ve taken out of your equity via your HELOC. The limit of your HELOC’s credit is based on your credit worthiness and the equity value you’ve built up.
A Look Into Second Mortgages
A second mortgage allows you to tap into a set amount of money that you will have to pay according to the schedule set out by your mortgage lenders. This is not the same as refinancing because unlike it, a second mortgage does not replace your first mortgage.
A second mortgage usually last for 15 to 30 years and offer you a fixed interest. The interest will be based on your credit history so the cleaner your record is, the lower the interest rate you will have to pay. The price of your home and the current market’s interest rates are also factored in.
Note that although the above means that your second mortgage will have a higher interest than your first one, the fees that you will have to pay are generally lower.
Should You Go for a HELOC or a Second Mortgage?
The main factors that will determine whether a second mortgage or a HELOC is better for you are your financial needs and your financial capabilities. If you need a substantial lump sum of cash, then a second mortgage will be best for you. On the other hand, if you are someone who needs small amounts of money on a recurring basis, then going for a HELOC would be better for you. Beware though that if you’re the type that gets easily tempted with purchases that you do not need, then getting a HELOC may not be the best idea.
To help you decide which loan can answer your needs, it would be in your best interest to talk to professional mortgage brokers who can help you choose your loan and connect you with refutable lenders.