Second Mortgage, Home Equity Loan, or Home Equity Line of Credit?

8/05/2020

If you’re looking to finance big expenses, you may be considering using your home as collateral to support it. If you’re considering taking out a second mortgage or applying for a home equity loan or line of credit, it’s important to understand the differences.

There is a misconception that home equity loans are second mortgages. Many people often confuse the jargon of second mortgages, home equity loans, and home equity lines of credit (HELOC) when describing an additional credit taken out against their home. There are slight differences and similarities between them that make them unique. Understanding the differences between the meanings could help you make more informed financial decisions about your personal finances.

Arkansas Federal Credit Union offers home equity loans and home equity lines of credit (HELOC) for low rates and zero cost for applications. Our home loan experts help our customers make smart loan decisions to get the most out of your home’s equity. If you are wondering about how a HELOC or home equity loan can help you and your financial needs, call your local branch to learn about your options.

What Is a Second Mortgage?

If you’re a homeowner, you’re probably familiar with the primary mortgage for your home. Most homeowners need a mortgage to finance their home purchase and may payments over a 15 or 30 year period. A second mortgage is not that much different. However, some of the borrowing aspects and risk involved are important to understand before taking out a second mortgage.

A second mortgage is an additional loan taken out on a home that already has a first mortgage. In other words, you’ll be making payments on both your first mortgage and your second mortgage at the same time. A second mortgage allows you to borrow up to what the equity of the home is worth and in most cases, the bank or credit union will allow you to borrow up to 80% of the equity.

You may borrow the equity of the home to pay off other expenses or debts like home improvements, weddings, college funds and other large expenses. The money is typically delivered in a lump sum. Because a second mortgage is a loan, it means it is also debt owed on the home that the owner is expected to pay back. A second mortgage means that you are using your home as collateral to gain access to financial resources.

What Is a Home Equity Loan?

Home equity loans may not seem that different from a second mortgage but there are key factors that should influence which is right for you. A home equity loan is a type of loan in which the owner uses the equity of the home as collateral. The amount of the loan is typically the difference between the total value of the home and the total outstanding mortgage. Liked a second mortgage, a home equity loan is also delivered in a lump sum to the borrower.

In many cases, a home equity loan is a type of second mortgage. However, it is important to note that if you own 100% of the equity of the home, your home equity loan is not considered a second lien on the home. Additionally, like a second mortgage, a home equity loan is an installment loan that is paid back over a fixed period of time.

You don’t have to have a primary loan in order to apply or qualify for a home equity loan. The key difference between a home equity loan and a second mortgage is that if you have paid off the first mortgage, you are able to use a home equity loan to borrow money and are able to borrow up to 100 percent of the equity in the home.

What Is a Home Equity Line of Credit (HELOC)?

A HELOC is a revolving line of credit. Rather than the loan being based on the equity of the home, a HELOC allows you to borrow up to a certain amount that is secured by the home. You will then pay the money back in monthly payments over a period of time.

Instead of being paid in a large sum of money based on a specified loan amount, a HELOC allows you to use your home’s equity as collateral on credit up, much like a secured credit card. Typically, you can borrow up to the amount of equity you have in your home in small amounts and make payments to pay back the credit over time with interest.

Once the borrowing period is over and the line of credit is paid off, you may reapply for another HELOC. The most important thing to consider when you’re using a HELOC is that your home is at risk if you default on the loan or you miss a payment and if you have a mortgage, you’ll still need to make mortgage payments in addition to HELOC payments.

Which Is Right for Me?

Understanding the differences and similarities between a second mortgage, home equity loan, and HELOC can be confusing and overwhelming. Typically, those who borrow home equity loans or HELOCs find lower interest rates and better payment options. However, each option offers different benefits depending on your unique situation.

If you’re stuck wondering which direction is the right one for you to take, consulting with your bank or credit union may provide you with the clarity you’re looking for. Arkansas Federal can offer you help and guidance when trying to find the best loan for you.

If you’re interested in learning more about how Arkansas Federal Credit Union can help you with your home loan options, feel free to contact us to talk to an expert today.

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