What is the difference between a second mortgage and a home equity loan?

If you need to access the equity in your home, there are a number of tools you can use to do this, two of which are second mortgages and home equity loans (also known as home equity lines of credit). Since some people also call second mortgages “home equity loans”, the terminology can get quite confusing.

So for the purpose of this article, when we discuss home equity loans, we are referring to home equity lines of credit of HELOCs.

What is a second mortgage?

A second mortgage is just like the name implies. It is an additional mortgage that you take out on your home. The amount that you can borrow is based on how much equity you have built up in your home. When a lender agrees to give you a second mortgage, it involves a lump sum and therefore is most commonly used for one-time expenses such as paying off debt, college tuition, home renovations, etc.

What is a Home Equity Loan?

A home equity loan is a line of credit which like a second mortgage is based on how much equity you have in your home. Unlike a second mortgage however, you do not receive the money in a lump sum but rather you are given access to a set amount of money that you can borrow from as needed. In a way, it is a bit like having a credit card. You have a max limit that you can borrow from but you are free to borrow smaller amounts. And, just like a credit card or personal line of credit, you can keep using a home equity loan as long as you continue to make the minimum payments. The major advantage this has over a credit card is that a home equity loan usually has much lower interest rates.

Which option is better?

It really depends on your circumstances and what you need the money for. As mentioned, second mortgages are more commonly used for larger, one-time expenses while home equity loans are a more suitable option for smaller but more frequent costs. Both options can help you reduce your debt by lowering your interest payments so if you are considering these tools for debt reduction, you will want to sit down with your mortgage broker to see which tool will fit best into your debt reduction strategy.

If you would like to get more information about second mortgages or home equity loans, contact the team at Matrix Mortgage Global today.