Many homeowners today confuse home equity loans with second mortgages. Second mortgages and home equity loans can be used for the purpose of cashing out equity in your home; however, there are fundamental differences between the two.
When lenders use the term “home equity loan,” they are most likely referring to a home equity line of credit. A home equity line of credit is not a mortgage. It is simply a line of credit that allows you to write checks or use a debit card against the value of equity in your home. A mortgage on the other hand, pays out a lump sum upon closing and has a fixed repayment schedule. Second mortgage loans are typically 15 to 30 year loans with adjustable or fixed interest rates.
Home equity lines of credit are more like credit cards. When you qualify for a home equity loan, the lender considers the amount of equity you have in your home. Home equity lines of credit offer convenience and ease of access to your equity. This comes at a premium however; home equity loans carry much higher interest rates than second mortgages.
Second mortgages are good for homeowners with specific requirements for their money. This could include paying for a child’s tuition, building an addition to your home, or even taking a vacation. The flexibility of a home equity loan allows you to borrow the money when you need it. You could save money by borrowing less and paying it back quickly using a home equity loan. The problem is many homeowners are tempted into spending money they would not have spent if it was not so easily available.
Louie Latour has twenty years of experience in the mortgage industry as a mortgage broker. He is the owner of Mortgage Refinance Advisor, a mortgage resource site devoted to saving homeowners money with a free guidebook “Five Things You Need to Know Before Refinancing a Mortgage.” http://www.refiadvisor.com
