Everyone has a dream to get their own house at some point or the other in their lifespan. Getting yourself a house is not an easy task and if you are not prepared with a budget then they are few options which one can consider, they are home equity loan and a second mortgage. Well, both are loans that can be used, but it is vital to understand the difference between both types of loans because they have differences in the interest rates, the repayment structure is different etc.
So what is a second Mortgage?
The second mortgage is nothing but another form of loan where you will get a lump sum amount as per your first mortgage. This loan can be available after your first mortgage and usually, the closing rates are considered to be very low compared to that of the first loan. The interest rates and the repayment structure for your second mortgage will be the same process.
Usually, this type of loan is offered and can be utilized for the following activities:
- Home improvement project
- Restructuring your debt
- Need for personal use
The loan process is simple and the success rate is actually a lot higher because your profile has already been audited before giving out your first loan. The key to getting a second mortgage loan is that the individual should have a valid income proof and also a good history of clearing the loans. This will help to expedite the process.
So what is Home Equity Loan is all about?
Home Equity loans are commonly addressed as HELOC, i.e. Home equity line of credit. It is a line of credit which can be used in different ways, like:
- Paying off for your children tuition-free
- Home improving projects
Most of the time people tend to use HELOC as a secondary mortgage and creates a confusion while opting the loan. It is always advised to make sure and go through the fine prints or the documentation offered by the bank to understand whether it is a second mortgage or a true line of credit.
It is like a credit card where you will have a certain limit to it in terms of spending and the repayments can be done based on how much amount of money has been utilized. The limit is actually determined by your qualification and also property evaluation.
So what is the difference and which one is better?
Both of the loan types can help you accomplish your goals and also reduce your debt. Also, second mortgages are usually tax deductibles. So while opting any of the loans, i.e. Second Mortgage or home equity loan, make sure that you don’t deplete all of your home equity.
Also, the sum of both the loans cannot be more than 90 to 95 percent of the home value. This will help you to have some cash for yourself when you decide to sell your house. Please read through all the documents pertaining to the loans and consult your lender before opting any of the loans.