Second Mortgage or Home Equity Loan: What You Need to Know

One of the things that drive me to distraction in the banking industry is when they use very different term interchangeably. This happens a lot when it comes to the terms “second mortgage” and “home equity loan.” As someone who has had both of these types of loans I can tell you that they are very different. Because they are so different you need to pay attention and take out the correct type of loan for your purposes. Either way you get the money but in some cases the borrowing will cost you more, thus some of us want to have an ideal way, regarding our concerns will provide with complete information for different types of loans which is really beneficial.

A second mortgage is very similar to your original mortgage. Its amount is based on the total value of the home. It’s often easier to obtain and the closing costs are generally much lower. It’s repaid in the same manner as a first mortgage and normally has a fixed interest rate. A second mortgage is a one time, lump sum amount of money that is typically used for large expenses such as debt restructuring or a large home improvement expense. Never borrow more than 90-95% of the value of your home. When you sell the home you want to either make a profit or break even; you don’t want to end up owing money.

A home equity loan is also often called a home equity line of credit. You are able to borrow only against the actual equity in your home, not the full value of the home. Frequently the borrower will be given a debit card that is used to withdraw the money from the equity. It’s frequently used for several purchases over time, such as college tuition. These loans have an adjustable interest rate which can make them most costly. Again, you do not want to completely deplete the equity in your home. If the market should decline you would end up owing more than they house is worth.

From personal experience, I can tell you that both loans have their positives and negatives. I used a home equity loan to pay for several improvements in my home before selling and was lucky that the improvements increased the value of my home enough to give me a profit even after the improvement costs and loan was repaid. My second mortgage allowed me to restructure debt after some major medical expenses. Because there was a fixed rate I was able to anticipate the monthly payments and was also able to repay the loan much faster. I only took a second mortgage for 10% of the value of my home. Never borrow more than you need.

Before you apply for either type of loan you will need your financial documents, proof of employment and a credit check. Note that the standard for either of these loans is much lower than it was when obtained your mortgage. The reason is simple; if you fail to repay the loan you will lose your house. The house itself acts as the collateral for home equity loans and second mortgages.


Fiona Scott graduated from the University of Melbourne with a degree in Mass Communication. She founded in 2015 after working as a content analyst for many years.

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