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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.

Mortgages, private mortgages, second mortgages, home equity loans—how does someone know what type of loan is right for them? Differentiating can be difficult and mind-numbing.

Second mortgages might be a touch less popular than other methods but that doesn’t mean that it should be considered less. A review of second mortgages can convey that this is a proven method to obtain funds and, more importantly, if this is right for you.

Here are some of the more important factors that a borrower should know.

A Second Mortgage is a Proven Way to Access Funds Quickly

Think of a second mortgage as a way to tap into the available equity in the investment of your home.  You can adhere to the terms of your first mortgage and most likely avoid any penalties associated with refinancing.

Remember, you need to have a good amount of equity in your home to leverage a second mortgage.

You can Pursue a Private Lender for a Second Mortgage

If you are having trouble being approved for a second mortgage by a traditional lender like a bank or even where you have your first mortgage, then you can consider private lending options.

Private lenders typically have less rigid qualification guidelines and are more open to different agreements that result in a borrower being approved.

The Different Types of Second Mortgages

Second mortgages can be accessed as a separate loan or it can be remitted in the form of a home equity loan or line of credit secured by your home.

How the funds are made available comes down to your preferences and circumstances.

Second Mortgages Work Best as Short-Term Solutions to Financial Problems

There are many situations where a second mortgage can be useful. Since it can come with higher interest rates, penalties and additional fees, it is best employed in the short term to get a borrower over a financial hurdle such as home renovations or to open a business.

Depending on the situation a borrower finds themselves in, second mortgages can be a useful lifeline. Make sure you understand the details and ramifications and that you go into the arrangement equipped with an exit strategy.

Most people don’t think of second mortgages as something that could be useful in a lot of different situations. It’s a way to get cash quick, to pull equity from your strongest asset and to solve short-term financial problems.

With any loan or situation where your home will act as collateral, it’s best to know the right time to consider this option and why it can be promising under the right circumstances.

What is a Second Mortgage?

This is a good place to start. A second mortgage is a mortgage taken out on a property that is already mortgaged. It uses your home as collateral and secures a loan like when you first purchased your home. The processes for both are similar.

What can a Second Mortgage be used for?

Once approved, it’s your money and can be used in any way you see fit. This doesn’t mean that all uses of a second mortgage are created equal, but it’s a lump sum for you to spend.

When Should Someone Consider a Second Mortgage?

There’s a lot of good reasons to consider applying for a second mortgage.  The first thing to consider is whether there is enough equity built into your home. If you’ve been paying off your mortgage for several years, it’s a good bet that there is.

Second mortgages are effective if you need a large sum of money and the popular reasons to apply are home improvements, debt consolidation, education or medical expenses. By no means, are these the only reasons though.

Are there Different Types of Second Mortgages?

Second mortgages can come in the form of a line of credit or as a more traditional loan. It comes down to what the applicant is more comfortable with as there is no right type.

Second mortgages shouldn’t be viewed as scary or that different from other methods of borrowing. Although there’s interest, it’s a way to access funds when needed and to leverage the investment of your home.

As with anything of this nature, it is always best to speak with a trained and knowledgeable professional.

Private mortgages are a valuable but under-utilized option for mortgage applicants. It’s especially useful for those who might not have the strongest application or want a little more flexibility that can come with working with a bank or traditional lender.

Strict Lending Rules Means that Alternative Options are Necessary

As more regulations are imposed on potential homeowners, there’s going to be a big pool of people who will have trouble qualifying. A portion of this pool won’t have access to a guarantor or be able to pay a higher interest rate.

The rules imposed by the Federal Government in October 2016 is a prime example of how private mortgages can fit into the business of lending and provide an intriguing option for many people.

How do I Apply for a Private Mortgage?

You can research, approach and meet with private lenders the same way you would with traditional. This is not a shady business but is out in the open and can be discovered through word of mouth or by searching the internet.

Each will have their own stipulations and regulations so it makes sense to shop around.

The Pros of a Private Mortgage

Not every applicant has a full-time job, T4, big down payment and strong credit rating. The big banks typically balk at borrowers who don’t check off enough boxes.

Financing through a private mortgage is a distinct alternative for someone (or a group of people) who fall into any of the following:

• Self-employed
• Foreign investors
• Applicants who are rebuilding their credit
• Applicants who owe taxes that are in arrears
• Anyone looking to flip a property
• Looking for equity for other ventures like starting a business

The Cons of a Private Mortgage

With this type of arrangement, the property matters as much as the applicant. You could be rejected if the property or location are not appealing to the lender.

There are always fees associated with working with private lenders whereas with traditional lenders, the banks typically pay the broker. It can be as low as 1% or as high as 5% so it’s best to ask each lender you are negotiating with.

If you’re having difficulty getting approved by traditional lenders than a private mortgage is worth reviewing. There are a ton of benefits using a private mortgage and it’s a proven way to get into the market.