What Is The Difference Between A Home Equity Loan And A Second Mortgage?

What is the difference between a home equity loan and a second mortgage? Many people are confused by second mortgages and home equity loans and think they are the same thing. The two loans are actually very different.

There are many reasons why we acquire loans. We might have high interest credit card debt, need to make major improvements to our home, send a child to college, pay off medical bills, or just go on a fun vacation. There are two ways that you can access the equity in your home in order to get money when you need it. Equity is the amount of money your home is worth after you have deducted the amount you still owe on your mortgage. You can borrow against this equity by taking out a second mortgage or by getting a home equity loan.

Many people are confused by second mortgages and home equity loans and think they are the same thing. The two loans are actually very different. Anne Reed of Acceptance Mortgage in Sparta, New Jersey, is a home loan expert.

"A second mortgage is similar to a home equity loan and is easily confused. A home equity generally refers to a line and a second mortgage generally refers to a loan, not a line," Reed said. "Unlike the line, the borrower receives the total loan amount at closing and will start to make fixed repayments every month until the loan is paid in full."

A home equity is a line of credit because you do not have to use the entire amount of the loan at once. You can also reuse the credit once you have paid it off. Lines of credit are useful to have on hand. If you have emergencies in the future, the money will be available for your use immediately and you will not have to go through the stressful process of obtaining a loan while you are already in a state of crisis. The interest rate on a home equity line of credit is usually a variable rate.

"Home equity lines are generally tied to the Prime rate and adjust accordingly," Reed said.

It is possible to freeze portions of your loan at certain interest rates in order to protect yourself against fluctuating rates. You can access your credit line using checks or a credit card.

A second mortgage is a specific amount of money paid to you in a lump sum. The interest rate is usually fixed and does not change until you pay off your loan. The payments on a second mortgage are a specific amount for a specific period of time, usually 15 years. Even though you have paid off some of the second mortgage loan you cannot reuse it.

"The loan cannot be drawn on and repaid like a line of credit," Reed said. If you have a need for a one-time sum of money then a second mortgage is a good option.

Both the second mortgage and the home equity line of credit will use your home as collateral. If you default on the loan you could lose your home. Both kinds of loans allow you to borrow a certain percentage of your equity, usually no more than 85%. You may also incur closing costs and fees with both kinds of loans.

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