What is the difference between a second mortgage and a HELOC?

What is the difference between a second mortgage and a HELOC?

Many mortgage industry terms are confusing to consumers. Multiple names often describe the same loan product or mortgage program. A second mortgage is one of those terms. A second mortgage is a loan you take out using your house as collateral while you still have another loan secured by that house.

Second mortgage

Second mortgages are also called “junior liens.”  Home Equity Loans and Home Equity Lines of Credit (HELOCs) are typical examples of second mortgages. The term “second” means that if you can no longer pay your mortgages and your home is sold to pay off the debt, the second loan is paid off in second position. If there is not enough equity to pay off both loans, the lender on the second may not be paid in full or at all. Due to this fact, second loans are considered riskier and can have higher interest rates than first mortgages.

HELOC

What does HELOC stand for? How often have you heard the term HELOC and wondered what that means? It stands for a Home Equity Line of Credit, and it is also a second mortgage. A HELOC is a revolving source of funds, much like a credit card you can access when needed. However, unlike a Home Equity Loan, they usually have a variable interest rate. Many homeowners like to have access to a line of credit they can borrow against when needed. The biggest argument against a HELOC is that the rate is variable, so the payment amount may fluctuate. In addition, some homeowners may be tempted to use the funds for unnecessary purchases, increasing their overall debt.

Home equity loan

A Home Equity Loan is a second mortgage. It is a loan that allows a homeowner to borrow against the equity in their home. The loan amount is based on the current value of the property and the amount owed on the existing mortgage. Home Equity Loans usually have a fixed interest rate, and the funds from this type of loan are paid out to the borrower in one lump sum.

A Home Equity Loan is much like a first mortgage when determining the loan amount and interest rate, the borrower’s credit score, payment history, and other aspects of their financial profile are considered. Home Equity Loans generally have shorter repayment terms, but the fixed interest rate makes them a valuable tool for some homeowners.

Pro Tips:

• A second mortgage is a loan using your home as collateral.
• A second mortgage is taken out while the first mortgage is still in place and actively being repaid.
• Home Equity Lines of Credit and Home Equity Loans are the most common types of second mortgages.

No matter what you call it, taking out a second mortgage adds to your overall debt burden. Anytime you do this, you are taking on more risk. It is essential to understand that your home is used as collateral with a home equity loan or home equity line of credit, and both options are second mortgages.

To learn more about second mortgage options at Mortgage Equity Partners, contact our loan team.