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Difference between Second Mortgage and Home Equity Loan

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Published: 26Dec2009
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Some people may not know it, but there is a big difference between second mortgage and home equity loan with line of credit. A second mortgage typically has a fixed amount which you need to repay within a fixed term. Meanwhile, a home equity loan with line of credit allows the homeowner to borrow funds anytime. Well, these types of loans are actually advantageous to borrowers depending on the situation. So, if you are planning to apply for a loan which will be secured by your home, you need to carefully consider which of these two types of home equity loans will be more convenient and easy for you to manage. So, here are some of points of comparison for these two loans.

One difference between second mortgage and home equity loan with line of credit is flexibility. The line of credit type is obviously more flexible than the second mortgage type because the former allows the borrower an open access to funds whenever needed. Meanwhile, a typical second mortgage loan presses the borrower to pay the loan anywhere within 5 to 15 years. So, if you think that you would need money every once in a while, you are better off with a home equity loan that comes with line of credit. Such loan is also advantageous if you plan to renovate your home periodically.

Another significant difference between second mortgage and home equity loan with line of credit is the level of self-restraint that can be accorded to the borrower. As mentioned, a home equity loan with line of credit is more flexible, but the chances of using such loan inappropriately can be higher than the other loan type. For one, with an open line of credit, a borrower may think of his or her loan as if it were a credit card. When a borrower can get the amount of money that he or she wants anytime, the temptation to spend more also increases. Meanwhile, a second mortgage loan has a fixed payment term, so a borrower will be compelled to pay and become more conservative.

Still, the biggest difference between second mortgage and home equity loan with line of credit is the interest rate. Typically, a second mortgage loan will have a higher interest rate and a fixed payment term. If you want a low interest loan, you can opt for a home equity loan with a line of credit.

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