Is there a difference between a second mortgage and a home equity loan? A second mortgage means the loan is subordinate to an existing mortgage. If you own the home free and clear, a new home equity loan may be in first lien position. A second mortgage refers to the loan’s position on your property.
A home equity loan is usually a lump sum, usually at a fixed rate. A home equity line of credit offers a revolving line of credit, usually with a variable rate. Both can be used and typically both would be a second mortgage as long as you have a first mortgage. There are some people that have a first mortgage, a home equity loan in second position and a HELOC in third position.
For those considering a home equity loan, you will want to consider the differences between a home equity loan and a HELOC. A home equity loan is usually one lump sum, it can’t be used again and the rate is typically a fixed rate. It is usually used for a large expense that is a one time purchase. A HELOC is a line of credit. You can draw from it as you need to and you pay interest on the amount that is outstanding. The payment can change based on the interest rate and the loan balance. Some plans offer a fixed rate option, others are just variable rates, usually based on prime.
When you sell your home, any mortgages will get paid off. So when you think about selling you will want to remember that you need to pay off any home equity loans (or HELOCs). If you are thinking about refinancing, you may want to combine a home equity loan into the new first mortgage. If you do not pay it off when you refinance, you will need to subordinate it.
There are still many homeowners that have low first mortgage interest rates and a home equity loan or HELOC can be a great way to access your equity without giving up the low first mortgage rates.
Leslie Vanderwerf, NMLS ID#335509, CrossCountry Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website
