Home equity loans and second mortgages are both types of loans that use your home as collateral. As a result, many people are confused about the difference between the two and may even think they are the same thing. The truth is however, that they are two different types of loans and to understand which option is better for you, you need to understand the difference.
Home Equity Line of Credit
A home equity loan – or home equity line of credit – is a revolving loan. Your lender will approve you for a specific amount (based on how much equity you have in your home) which you can then borrow from and pay back as often as you wish without having to apply for a new loan. The amount that you have to pay back each month will be determined by how much you currently have borrowed.
The amount that you can borrow with a second mortgage is also determined by how much equity you have in your home. This type of loan is paid out as one lump sum, and the borrower must make regular payments. The interest on a second mortgage is higher than the interest of a first mortgage because lenders generally consider this a riskier investment. Nevertheless, the interest on second mortgages is still much lower than other types of credit.
Which Option is Best for Me?
Whether you choose a home equity loan or a second mortgage really is going to depend on your needs. If the loan is to satisfy a one-time need (such as a home renovation), then a second mortgage may be the better choice. If you have a recurring need for the money, then a home equity line of credit might make more sense.
With either option, the main requirement is that you have sufficient equity in your home to borrow from. Remember though, that since you are borrowing against your home you must be sure that you will be able to make the payments. Otherwise, you could risk losing your home.
If you are considering either of these options, you should contact your mortgage broker who can analyse your situation and make a recommendation that suits your needs.
Are you interested in learning more about home equity loans and second mortgages? If so, contact me today to set up an appointment.