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.