Second Mortgage vs Home Equity Loan

If you find yourself in need of extra money for your child’s education, home renovations, or paying off some debt, you might consider getting a home equity loan or a second mortgage loan.

Second mortgage is basically a term used to refer to a loan that is taken out using a real estate as collateral where the lender will not have any claim to the collateral if you default on your loan. On the other hand, home equity loan lets the homeowner borrow against the home’s equity. If you are going to take a look at the two in a glance, you’ll find that they are almost the same thing, but are they?

What are their Similarities?

Let’s talk about the similarities of second mortgage and home equity loan. If you apply for a home equity loan while there is still an outstanding debt, your loan will be deemed as a second mortgage. This means that the lender for your home equity loan will have secondary claim to your property that you placed as collateral in the event that you default on your payments.

In the event that you default on your primary mortgage or the second mortgage, which is your home equity loan, the lender will proceed with the foreclosure. The primary lender will be the first one to have claims on the foreclosure and anything that gets left behind will be for the second lender.

Compared to the interest rate that you’ll get from your first mortgage, the interest rate on your second mortgage will be higher since the position of the second lender has a higher risk because they will be secondary to the claims on your property when you default. A home equity loan usually has a fixed rate with up to 10 to 15 years of term.

What are Their Differences?

The difference between the two is that when you apply for a home equity loan when you no longer have any mortgage to pay for, the home equity loan will not be deemed as second mortgage. This is due to the fact that your loan application is no longer secondary to any existing mortgage lien that you have.

The biggest risk when applying for either second mortgage or home equity loan is putting your property at risk in the event that you are not able to pay your dues on time. This is why you need to weigh your options first before applying for either of the two.