Difference between a second mortgage and a home equity loan

Mortgages and equity loans are two different types of loans which one can take out on your home. Mortgage is the original loan that one can take to purchase your home One may choose to take a second mortgage in order to cover a part of purchasing your home or make refinance to cash out some of the equity of your home .

It is very important to understand the differences between a second mortgage and home equity loan before deciding on which loan you should use .Both types of the loans have same tax benefits since an individual can deduct the interest on each. Therefore the difference between the two loans is the method in which the loan is paid out and handled by the bank.


A home equity loan operates around the credit. The bank opens the credit line and equity in your home gives a guarantee on the loan .A revolving line of credit means that one can borrow up to a certain amount and do some monthly payments. The payments are usually determined by the amount you currently owe on the loan. Once the money is paid off, one is allowed to borrow the money again without applying for another loan.

Second mortgage operates differently. The loan is paid in one lumpsum at the beginning of the loan. The amount of payment and term of the loan are already set. Once the loan is paid, then one needs to open up a new loan in order to borrow against the equity in your home again.

Home equity loans act as a line growing equity of credit. This means that the bank can approve for one to borrow up to a certain amount, of your home though your equity in the home should act as a security for the loan in case one defaults in payment. The interest rates are relatively lower compared to the way they would be with the credit card. Mostly home equity loans have changing interest rate that varies depending on the conditions of the market.

Unlike second mortgage loans do not have a set of monthly payment with a term attached to it. It is like a credit card than a second mortgage because it revolves around debt where you will need a minimum monthly payment. Therefore, one can refund the loan and draw out the money again to pay bills or work on another project.

Most of the people commend this type of loan as it is flexible. Therefore you only need to take as much as you need, that will save your money in terms of interest.

The rate on the line of credit on second mortgage is typically adjustable and the term can be anywhere from 15 to 30 years while home equity lines have got a draw period that occurs in the first 10 to 15 years, with the remaining term on the loan referred to as the repayment period.

Therefore, before making a decision of taking any of the loans, one must keep in mind the repayment methods and the period of time which the loan takes to mature.

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