Mortgage Vs Home Equity Loan Guide

Although there are variations in a second mortgage and the home equity loan, many homeowners are still confused about the difference between the two. Second mortgages are a type of home equity loan; however, home equity loans are usually termed as a line of credit. For making the most of the built up equity, it is essential to determine whether a second mortgage or a home equity loan is the right decision.

Before you decide upon any of the two, you ought to know the basics of second mortgage and the home equity loan.

Second Mortgage Vs Home Equity Loan

Second mortgages pay out a predetermined sum of money, as either a line of credit, in monthly installments or all at once. It is then paid back in a particular schedule just like the original mortgage. Dissimilar to refinancing, second mortgages do not supersede the initial mortgage.

Typically, second mortgages are 5 to 30-year mortgage loans that have a fixed rate of interest. Just like the original mortgage loans, the points and interest rate would be based on the present credit history, the current interest rate, and pricing of the house. The interest rates on a second mortgage are a little higher and the fees lower.

In contrast, home equity loans are similar to the credit card, and may even include credit cards for making purchases. When an individual has equity on the house, he or she can acquire extra cash by means of the home equity loan.

These loans can be paid at the same time or in small payments. Some people get their money through the line of credit that lets them withdraw money whenever needed. Very similar to credit cards, home equity loans have a certain amount of interest charged and the amount to be borrowed is decided based on the individual’s creditworthiness.

For determining the limits of a home equity loan, the lender would gauge appraised value of the house and start calculations at 75 % of the given value. Thereafter, the lender would deduct the outstanding balance owed on the given mortgage.

Present financial needs would help in determining the type of loan. If money were required for a one-time expense, like paying for wedding preparations, it would be best to go for fixed-rate second mortgages.

If frequent needs for additional cash would arise in future, it would be smarter to opt for a home equity loan line of credit. Line of credit lets homeowners borrow money whenever needed and, if repayments were done equally quickly money would be more likely to be saved compared to second mortgages.

Moreover, it is essential to take into consideration the spending habits of an individual. If owning an additional credit card would make it more tempting to splurge more often, it could be very upsetting to obtain a home equity loan line of credit.

By James Tam
Published: 9/28/2007