MAY 31ST, 2023

Home Equity Loans vs. Second Mortgages

Due to the many similarities in these loan products, this document provides two sections of full-scope detailed information about Home Equity Loans and a second section for Second Mortgages. All the information is compiled in this one document so that consumers can easily see the similarities/differences between the two loan types.

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Home Equity Loans

Home Equity Loans, also called or known as “Second Mortgage” loans, are loans that homeowners can obtain by leveraging the built-up equity in their home. In fact, a consumer’s home may likely be a unnoticed source of wealth they may not even be aware of. A home’s equity is the difference between what is owed and what the property is worth. This type of loan allows a consumer to borrow money based on that amount. Additionally, the amount of equity a consumer currently has is not based on the sale price of their home, but it is based on what the house is worth. The amount a consumer can borrow against their equity varies from one lender to another and is determined by the loan the consumer takes out. For instance, if a consumer takes out a new mortgage, they might borrow more than their equity value. Should a consumer take out a second mortgage or home equity line of credit (HELOC), they can generally borrow up to 75% of their equity. There are many Home Equity Loans that come as Fixed-Rate products and have varying terms anywhere from five to fifteen years.

The qualifying process for a Home Equity Loan is quite similar to that of a first mortgage loan. The chosen lender will make a determination of one’s credit limit by estimating the consumer’s ability to pay back the loan. There are a few factors lenders will also take into consideration such as the consumer’s income, other debts or financial responsibilities. Lenders will look at items such as amounts owed on vehicles, credit card debt, spousal support/child support and any court-ordered payment obligations. There are some lenders who charge points. One point is the equivalent to 1% of the amount of the credit and the points are then paid when the loan closes – they are not added into the interest rate.

Home Equity Loans are an extremely sensible solution for unexpected and expensive cost outlays. Examples of unexpected yet costly items are things such as emergency medical bills or important & necessary home improvements. These examples are sufficient, good reasons to obtain a Home Equity Loan if the consumer has the means to pay it back. On the downside, if a consumer has poor/bad credit issues or spending problems and need cash to pay off their debt, a Home Equity Loan is not a good solution. In fact, unless the consumer changes their spending habits, a Home Equity Loan could push them further into debt. For example, these type of loans can be an excellent source to pay off other higher interest debt such as automobile loans or credit cards. The annual percentage rate (APR) on Home Equity Loans is generally much lower than most other consumer debt. Consumers should BEWARE their home is collateral for the loan; therefore, if the consumer defaults on payments, they could lose their home.

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About Home Equity Loans

As a consumer shops for their Home Equity Loan, it is vitally important to make it a point to count all the associated costs before deciding on a lender. The annual percentage rate (APR) does not include costs such as closing and other costs/fees like filing fees, title search fees, attorney fees, insurance and taxes.

There are also a great deal of ways a consumer could borrow against their home equity with all the various programs/products now available, such as:

• Cash Out Refinance Loans – take out a new mortgage for a higher loan amount and keep the difference.

• Refinance Loans – refinance the same amount but with a new interest rate or terms.

• 125 Home Equity Loans – one could borrow more than the present value of their home.

• Second Mortgage Loans – obtain a second mortgage while retaining the existing loan.

• Home Equity Lines of Credit (HELOC) – this is a form of revolving-type credit in which a consumer’s home serves as collateral.

• Bad Credit Home Equity Loans – having bad credit does not mean you can not get a home equity loan.

Common Questions: Advantages & Disadvantages of Home Equity Loans
The premium advantage #1 is that a Home Equity Loan provides homeowners with easy access to cash.

The premium advantage #2 of this type loan is that even though interest rates on Home Equity Loans are higher than a first mortgage, they are still lower than a credit card; therefore, a Home Equity Loan may prove as a useful solution to paying off credit card debt and the consumer would be saving money on interest.

The premium advantage #3 is that the interest paid on a Home Equity Loan is tax-deductible. This is a great financial benefit for consumers.

The main disadvantage is Home Equity Loans frequently carry a higher interest rate than an original mortgage.

Second Mortgages

A second mortgage means exactly what it says it is – a loan made “in addition” to a first mortgage, and it is based on the amount of equity one has built into their home. There are many consumers who use them to pay for home improvements/renovations, pay off debts, etc. The consumer has already been through the process for their first mortgage; therefore, the underwriting requirements for a second mortgage is usually much easier as well as the cost of the transactions involved are usually significantly lower. These things can make up for the fact that interest rates on the second mortgage are a tad higher than the first mortgage.

For a second mortgage, the consumer borrows a fixed sum of money against their home equity and then pay it back over a specified period. The amount borrowed will be combined with the amount still owed on the first mortgage. Second mortgage loans are different from first mortgages in that they often have a higher interest rate and are usually for a shorter term or period of time. Second mortgages are traditionally offered with a fixed amount as well as a predetermined repayment plan. It is of utmost importance that consumers understand how much their monthly payments will be and what they include. It is advisable to shop around, make comparisons, etc. when looking for an appropriate lender.

General Overview for Second Mortgages
A consumer’s home is likely their biggest asset. By having a home to assist and back a consumer up when they need a loan is one of the most advantageous strategies of homeownership. Recently, there has been a substantial increase in the amount of consumers looking to use their homes as a means to get access to extra cash when they need it most, and, one of the best ways to accomplish this is through a second mortgage.

About Second Mortgages and Recent News, News History, if applicable
Consumers should take the time to investigate other options of borrowing against the equity of their home inclusive of loan products such as a home equity loan and a home equity line of credit or HELOC. All these options provide an avenue for consumers to borrow against their equity but keep in mind that there are minor variations among these options that indicate one of the three options available may be the best option for the consumer. For the most part, it depends on the consumer’s individual financial status, the amount of money the consumer needs to borrow, as well as the amount of home equity the consumer has accumulated.

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Advantages & Disadvantages of Second Mortgages

The premium advantage of this type mortgage is getting the access to extra cash when it may be needed most. Uses could be help for consumers to pay for home improvements/renovations, pay off debts, etc.

The main disadvantage is there are a few issues to keep in mind, even though it may all sound quite simple. Most importantly, do not take out a second mortgage on a home unless a fair amount of equity has been built up in the property already – simply put, it means that payments were made on the original mortgage balance for a sufficient amount of time. Even if a consumer does not have much equity accumulated, they may still be able to obtain a second mortgage but there are drawbacks to this scenario including rates will be much higher and the amount that can be borrowed will be much lower which does not allow for a good financial opportunity.

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This site is not a broker and does not collect or solicit mortgage applications. Content is for informational or comparison purposes only. Services are not available in New York. Products and services may not be available in all other states.