There is some confusion about the terms
second mortgage, home equity loans and home equity line
of credit. There are some similarities between these
types of loans, but there are some important differences
as well.
One of the most important things to remember is that
some people use the terms second mortgage and home equity
loan interchangeably. Another important point is that
some people don’t know either meaning. Finally,
keep in mind that you should never assume that you know
what second mortgage and home equity loan will mean
when it comes to the terms of a loan. Be sure that you’re
clear with the lenders and that you know exactly what
will be required for repayment.
As a general rule, lenders will only offer second mortgages
and home equity loans up to a certain percent of the
value of your home. Though some lenders are willing
to offer loans that total 100 percent of the market
value (or sometimes even more), many have limits that
range from 80 to 90 percent. If you have equity in your
home, you own an asset. A second mortgage or home equity
loan may be a good way to put that asset to work.
Often, a second mortgage is taken out at the time of
the original loan. This usually happens if the buyer
doesn’t have enough cash to make the down payment.
The second mortgage may help make the down payment,
pay for closing costs and even the costs of moving.
A home equity loan is more often sought after the new
owner has been paying on the property for a period of
several years. When the value of the property is significantly
more than the amount owed, that home equity may be used
as collateral for a loan. These proceeds are often used
for remodeling, college, debt consolidation or vacations.
It is possible to take out a home equity loan at the
time of the purchase, if the amount you’re paying
the former owner is less than the market value. It’s
also possible to take out a second mortgage after you’ve
paid on the mortgage for a period of time and accrued
equity in your home.
Very strictly speaking, the terms of the second mortgage
and home equity loans are often similar. In many cases
(and depending on the terminology used by the lender),
mortgage insurance may be required on a second mortgage
but not on a home equity loan.
The similarities and differences between the home equity
loan and the second mortgage are very dependent on the
way the lender and the borrower use the terms. Be sure
that you talk to your lender about how these two loans
work and which is best suited to your situation.
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