Compare: Home Equity Loans vs. Second Mortgage
Getting a home can help you get numerous benefits, including the opportunity to increase your equity. There are different ways to tap into this market. Some of the most common procedures include home equity loans and second mortgages. But before you give your home as collateral to get cash, you should know the difference between the two.
What is a Second Mortgage?
A second mortgage refers to a loan you take out after the first mortgage loan. Second mortgage loans are much smaller than the first mortgage loan. Similar to the first mortgage, the home acts as collateral, and you must pay back the loan over time with interest. After you take the second mortgage, you need to make two monthly mortgage payments.
Typically, the second mortgage has a higher interest on payments since the element of risk is higher. By default, the first mortgage loan takes priority, and in case of a foreclosure, the second mortgage lender may get nothing at all. To compensate themselves and take the risk, the lenders charge a higher interest rate.
What is a Home Equity Loan?
Home equity loan refers to the loan taken against the value of your home. In a nutshell, it is a second mortgage. In this type of loan, borrowers have the ability to decide how much they need. When these loans are approved, borrowers get this amount in a lump sum. Unlike the mortgage, the interest rate is fixed and requires a schedule for the payments.
Usually, lenders may give you almost 80% of the equity value of your home in terms of a loan. But in some instances, it may exceed 85%. Borrowers may use it for different purposes, which may include business investment, spending on a wedding, and home improvement.
Second Mortgage vs. Home Equity Loan
Home equity loans and second mortgages are more or less the same things. A home equity loan is a second mortgage that is issued by securing a particular property. Whenever people talk about it, they don’t need to discuss “which is better?” But rather, “Should I get it or not”
A second mortgage will help you identify the worth of your house and property. Moreover, it also offers flexibility with the payments. You can spend the money on just about anything as long as you keep meeting deadlines. You can even use the money on home renovations to increase the overall worth of the property. Or, you can pay off another loan with high-interest payments.
One of the biggest drawbacks of a home equity loan is that the mortgage is secured by a home. Ultimately, it means that if you are unable to meet the payment schedule, you are at significant risk of foreclosure. Not only will you lose your house, but all the money you invested in the house as well.
It can be hard to decide whether a second mortgage is right for you or not. Therefore, it is important to get financial advice from a professional. At AFBN, we offer financial consultation to help you make an informed decision. Reach out to us now! Toll-Free (866) 729-7845, Fax (702) 489-4254. We look forward to serving you.