2nd Mortgage vs. Home Equity Loan vs. Home Equity Line of Credit
The finance industry often advertises 2nd mortgages, home equity loans, and home equity lines of credit and they try to entice you into securing either one or the other. The distinction between the three is sometimes muddled. Is there a difference? Isn’t the home equity loan the same thing as a 2nd mortgage? How is a 2nd mortgage different from a line of credit? These terms have been the source of a lot of confusion in the mortgage industry and many people have applied for one when they should have applied for another. It is very important to understand each type of financing and its ramifications before signing on the bottom line.
The 2nd mortgage is often described as a loan that is secured by your home that is already under a separate mortgage loan. The 2nd mortgage is secured by your home and can be foreclosed if you default on the loan. The home equity loan is another name for the 2nd mortgage. These two loans are essentially the same. The name that is used in the documentation depends largely on the lender. Some lenders prefer to denote the loan as a 2nd mortgage while others prefer to use the term home equity loan. Both loans are the same. Both loans are secured by your home when it already under a first mortgage.
The home equity line of credit, or HELOC, is similar to a credit card. This means that you will not receive a lump sum as you would if you received a 2nd mortgage. The amount that you apply for and receive would be granted in the form of a credit line, much like a credit card account. The loan can be accessed via cheques that are written against the line of credit. The interest rate on a HELOC is variable and will change from month to month, depending on how much of the credit line you access. A HELOC can be used for as long as there are funds in the account, which makes this form of financing more attractive to people who want to fund a college education or some similar debt. A HELOC is also more attractive to people who do not want to access the entire value of their home’s equity at one time. A 2nd mortgage will give you access to the entire value of your home’s equity.
When you begin to research your options, you need to determine how you will be using the money. If you need to fund a one-time event, such as consolidating high interest debt, then a 2nd mortgage may appeal to you. If you need to finance a series of events, such as college tuition or several home improvement projects, then a HELOC may be the option for you. Be sure that you have a clear understanding of your financial goals and that you understand the differences between the 2nd mortgage, the home equity loan, and the home equity line of credit.
Suzanne Simpson is Mortgage Associate based in Canada. She has written many papers on Mortgage and related topics. For more information on <a href=”http://www.canadianmortgagesinc.ca/second_mortgage/“> 2nd Mortgage</a> and<a href=”http://www.canadianmortgagesinc.ca/second_mortgage/canada.html“> 2nd mortgage in Canada</a> ,
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