2nd Mortgage or Home Equity
Loan |
By L. Sampson |
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Homeowners often group 2nd mortgages and home equity loans into the
same category. While 2nd mortgages are a type of home equity loan,
other equity options also fall under home equity loans. For example,
when choosing a home equity loan, homeowners may opt for a home
equity line of credit (HELOC). If deciding to tap into their equity,
homeowners must choose the best option, a 2nd mortgage or home
equity loan.
What are 2nd Mortgages?
When
opting for a 2nd mortgage, homeowners receive a fixed amount of
money. Similar to the initial mortgage, a 2nd mortgage has a fixed
repayment period. Sometimes, 2nd mortgages are confused with
mortgage refinancing; however, the two processes are very different.
A refinancing creates a new home loan to replace the old, whereas a
2nd mortgage creates a second lien on the property.
Homeowners have the option of selecting a 2nd mortgage with a 15 or
30 year term. The majority of 2nd mortgages have fixed rates. Yet,
it is possible to obtain a second mortgage with a variable or
adjustable rate.
Before applying for a 2nd mortgage, bear in
mind that these mortgages tend to have a slightly higher rate than
1st mortgages. Similarly, rates are determined by an applicant's
credit history.
What is a Home Equity Loan?
Home equity lines of credits are not loans. Moreover, homeowners do
not obtain a fixed sum in one lump payment. Instead, these credit
accounts consist of an open line of credit. This is comparable to a
credit card. In fact, debit or credit cards are often used to
withdraw funds from a home equity line of credit.
The credit
limit on a home equity line of credit is based on the appraised
value of your property. Usually, lenders will not approve a line of
credit for the full appraisal value. Rather, homeowners with a good
credit history may be able to obtain a revolving credit for up to
75% of the home's worth.
Home equity lines of credit benefit
homeowners who want the freedom of withdrawing funds on an as needed
basis. On the other hand, second mortgages are generally more suited
for individuals who require a one-time lump sum of money. |
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