Is a home equity loan a second mortgage?
A second mortgage is a loan taken out using your home as the collateral to secure the loan, when you already have a first mortgage that is also secured by your home.
Home equity loans and home equity lines of credit (HELOCs) are two types of second mortgages. The difference between a second mortgage and a home equity loan is that a second mortgage doesn’t replace your first mortgage. However, a second mortgage does add to your total debt burden because you will be making an additional loan payment each month.
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What are second mortgages?
A second mortgage commitment takes place when a homeowner has an existing (first) mortgage and takes out a new additional loan based on the equity in their home.
A home equity loan or home equity line of credit that becomes a second financial obligation that must be repaid are considered second mortgages. Both types of loans act as additional liens on the home that must be repaid according to the terms of the loan. Failure to repay a first or second mortgage can result in the lender foreclosing on the home.
Types of second mortgages
There are two types of loans that are considered second mortgages:
Home equity loans. When it comes to comparing a second mortgage vs. home equity loan, they are essentially the same thing. A home equity loan is often referred to as a second mortgage. When approved for a
home equity loan you receive the amount you are approved for in a lump sum of money. Loan re-payments begin right away. Home equity loans are paid back based on a fixed interest rate.
Home equity line of credit (HELOC). When approved for a
HELOC you’ll have access to a line of credit up to the amount you were approved for. You will only pay interest on the amount you use, not the total loan amount (unless you utilize the entire sum). Most HELOCs are paid back based on a variable or adjustable interest rate.
Advantages of second mortgages
- Larger loan amount. Home equity loans and HELOCS offer higher loan amounts than a personal loan.
- Lower interest rates. Home equity loans and HELOCS are a good way to borrow cash and pay a lower interest rate than you would by using a credit card. Credit cards have high interest rates and if you only make a minimum payment and do not pay the card balance in full, you will be adding to your debt even as you make payments.
- Spending flexibility. Some loans must be used for a specific purpose, for example, student loans and auto loans. Second mortgage loans can be used for any type of purchase.
Why take out a second mortgage?
What is better, a home equity loan or second mortgage? A home equity loan is a type of second mortgage, so there is no difference. However, a
home equity loan is different than a
HELOC which is also a type of second mortgage.
There are many reasons why homeowners would choose to get a second mortgage, including:
Access to home equity. There are many good
uses for a home equity loan, such as making home improvements that increase the value of your home, paying medical bills, starting a small business, or paying college tuition.
Learn more about the uses of home equity loans.
Avoid private mortgage insurance (PMI) on a home purchase.
PMI is typically required by lenders when borrowers make a down payment of less than 20% on a property using a conventional loan. To avoid paying PMI, homebuyers may use a purchase strategy called a “piggyback” mortgage loan. To do this, the homebuyer takes out a first mortgage and a second mortgage that is a home equity loan or HELOC. According to the Consumer Financial Protection Bureau, when using a “piggyback” mortgage, lenders structure the loans differently. For example, the borrower might pay for the home with a 10% down payment, 80% main mortgage, and a 10% “piggyback” second mortgage.
You want to borrow more than what a cash-out refinance can offer. A
cash-out refinance is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing. Depending on how much of a mortgage you are approved for, the cash-out you qualify for may not be enough to meet your needs. In that case a second mortgage may be a better option.
FAQs
When should I consider a second mortgage?
If you need cash for making home improvements, paying college tuition, paying-off high-interest credit card debt, paying medical bills, or financing a new small business, then a second mortgage could help you meet your goals.
Home equity loan vs. HELOC: which is better?
Both loan types have advantages, and the one you choose should be the one that best meets your financial needs. Although similar, HELOCs and Home Equity Loans have some key differences. A HELOC grants homeowners’ access to a specific amount of money during a draw period and typically has a variable interest rate that’s charged only against the amount of money that’s withdrawn. A home equity loan provides the loan amount to the borrower in a lump sum, which they then need to pay interest against. Most home equity loans have a fixed interest rate that’s charged on the entire lump sum amount.
What's the difference between refinancing and taking on a second mortgage?
A refinance is a new mortgage with a new interest rate and term that replaces the original mortgage. A second mortgage is additional to the first mortgage.
What are some alternatives to second mortgages?
- Cash-out refinance. Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest), and in the process, borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.
- Personal loan. You may get the cash you need using a personal loan. A personal loan is granted to an individual based in their creditworthiness (not collateral).
- Debit consolidation loan. Debt consolidation refers to taking out one loan to pay off other loans. This is particularly useful to people who want to consolidate high-interest credit card debt when they have several balances. Credit unions and banks may offer loans specifically for debt consolidation.
- Reverse mortgage. If you’re 62 or older and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses you may be eligible for a reverse mortgage. This loan allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. The danger of a reverse mortgage is that you lose equity and end up owing a larger sum at the end, which could affect your heirs.
- Home improvement loan. Credit unions and banks offer home improvement loans, specifically for making home improvements as part of the homebuying process or after you have already owned your home for some time.Can I refinance my home to pay off a second mortgage?
Yes, you can refinance your home to pay off a second mortgage. However, in a rising mortgage interest rate environment you should only refinance if you can get a lower rate on the mortgage.
Is taking on a second mortgage worth it?
A second mortgage may be worth it if you have equity in your home, have secure employment and steady income to repay the loan.
Can I use a second mortgage to buy another house?
Yes, you can use a second mortgage to purchase a second home or investment property.
Can you refinance a second mortgage?
Yes, you can refinance a second mortgage. It is possible to refinance the loan to a different amount and term. Be sure to ask your lender if there is a pre-payment penalty for refinancing before the end of the term of the original loan.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our home equity loan experts.
Get Started on Your Home Equity Loan Today!