Life happens and when it does it can be costly. Lots of people seek out additional funds for business ventures, cash flow shortage, medical expenses, travel, home renovations, to name a few.
Once you’ve decided to take advantage of your home equity, the next decision will be about what loan offers you the most. Two options will most likely be available: a second mortgage or a home equity loan (which can also come in the form of a line of credit).
To avoid any further confusion between the two, let’s break down their similarities and their differences.
What are the Similarities Between a Second Mortgage and a Home Equity Loan?
At first glance and to the untrained eye, these two types of loans probably appear very similar. They both borrow against the equity in your home. The criteria for approval is nearly identical. They seem to have more in common than they do separating them.
How do Second Mortgages and Home Equity Loans Differ?
A home equity loan acts more like a traditional loan in the sense that money is made available to you and you repay a set amount based on the agreed upon terms. Repayment usually takes less time than a second mortgage. While it does involving using your home as collateral it is independent of your mortgage.
A second mortgage provides a fixed amount of money that must be repaid on a fixed schedule. Staring with the application process (based on credit history, interest rate and price of home) and including your repayment terms, it should look and feel like your first mortgage.
Second mortgages are typically 15 to 30 year loans with a fixed rate. The catch is that the rates can be a touch higher but the fees can be lower.
Your Financial Needs are the Biggest Differentiator
If you need money for a singular reason, such as a one-time expense like a home renovation than a second mortgage might make more sense. If you require access to a pool of money to pay for tuition or several home repairs than a home equity loan or line of credit is probably more suitable.
This can get murky so the best advice is to sit down with an expert and allow them to guide you through the pros and cons of each with your specific situation in mind.