Difference between Second Mortgage and Home Equity Loan
Often when homeowners want to cash in on some of their net worth by tapping into their home equity, they hear many different terms. Two of those most popular terms are home equity loans and second mortgages. So just what is the difference? Some answer this by saying “all home equity loans are second mortgages; but not all second mortgages are home equity loans.” However, that’s not exactly true either.
A second mortgage is any loan that is placed on a property in addition to the first mortgage. Second mortgages sit, as their name indicates, in the second lien position and so, the first mortgage debt must be paid before the second mortgage is paid off. Should the property owner default on the second mortgage, the holder of the first mortgage would be able to take the property as collateral, and the holder of the second mortgage could be left with nothing. This is one reason why it can sometimes be harder to be approved for a second mortgage, especially with major lenders and if there’s little equity in the home.
Second mortgages go by a few different names, with the most common being home equity lines of credit and home equity loans.
Home equity loans are a type of home loan that can be a second mortgage, but that’s not always necessarily the case. In order to be approved for a home equity loan, homeowners typically need to have at least 20% equity in their home. This can be done by improving the home and adding on to its original value; or it can be done by paying down the current debt by paying the mortgage.
While home equity loans are often a second mortgage for the homeowner, meaning that they still have a first mortgage in place, this isn’t always true. In instances when homeowners own their home outright, they have 100% equity in their home. And more importantly, they no longer have a first mortgage. When this is the case, the homeowner can borrow against that equity by taking out a home equity loan. Because there is no first mortgage loan however, the home equity loan would take the first position and would be a first mortgage, rather than a second.
When homeowners need a little extra cash tapping into their home equity is a great way to get it, and both second mortgages and home equity loans are great ways to go about doing that. However, whether you actually choose to use a home equity loan will depend on your own situation and needs.
Even when home equity loans are used as second mortgages, there are other types of second mortgage loans, such as home equity lines of credit, that might be a better option. These loans give the homeowner access to their money, no matter how much is needed, and it can be withdrawn whenever needed. These can be better options for homeowners that need small amounts of money over a large period of time, or those that want to use a second mortgage as an emergency fund.
Bryan J is the author of this article. For more information about home equity line of credit or Mortgage Broker please visit canadianmortgagesinc.ca.
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