In this article, we will take a look at a second mortgage vs. a home equity loan, explain the similarities and differences and explore when you should choose one over the other.

What Is a Second Mortgage?

A second mortgage is a loan against the equity you have built up in your house, with your home used as collateral. It is not a refinance, but a new loan.

What Is a Home Equity Loan?

You may be wondering, is a home equity loan a second mortgage? Yes, but there are two different types of home equity loans: a lump sum payment or a home equity line of credit (HELOC). Rather than being given to you in one lump sum, a HELOC is set up for the homeowner as a line of credit that can be used for a set amount of time, usually 5 or 10 years.

There can be some confusion when using these terms. Consumers usually use the term “second mortgage” while the industry refers to it as a “home equity loan.” A HELOC is usually referred to as a “home equity loan” by consumers while the financial industry uses “HELOC.” For the purposes of this article, we will refer to lump sum home equity loans as second mortgages and HELOCs as home equity loans.

Differences Between a Second Mortgage and a Home Equity Loan

There are many differences between a second mortgage and a home equity loan.

  • Second mortgages have a fixed interest rate, home equity loans have variable rates.
  • With a second mortgage, you have to begin payback immediately. With a home equity loan, you only have to pay back when you withdraw money from your line of credit.
  • With a home equity loan, any payment you make is returned to your line of credit. A second mortgage payment goes toward paying down the loan.

Eligibility Criteria for Home Equity Loans and Second Mortgages

Although eligibility criteria can vary from lender to lender, they typically are the same for a second mortgage as they are for a home equity loan and can include the following:

  • 15-20 percent equity in your home
  • Credit score of at least 640
  • Debt-to-income ratio of 43 percent or lower
  • Current, reliable income

Which Is Better: Second Mortgages or Home Equity Loans?

There is no right answer to this question. The answer depends on your circumstances and your reason for needing a loan,

If you need a large amount of money in the short term for a home renovation or to pay off another higher-interest debt, a second mortgage may be the best option. If you are looking for smaller amounts of money over a longer period of time, like for college tuition payments or ongoing home projects, then a home equity loan would be a better option, because you only pay on the amount you need to borrow.

Let Supreme Lending Help You Secure a Second Mortgage or Home Equity Loan

Now that we have compared a second mortgage vs. home equity loan, you can evaluate your available options for tapping into the equity in your home or improving your financial situation, including a rate term refinance. Supreme Lending’s team of experts is always here to help you and your family with every step of the process. Contact us today.

Mark Dusza

Loan Officer NMLS #860285
Direct: 469.857.7255
Cell: 214.641.8197

[email protected]

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