It’s time for another installment of “mortgage match-ups.”
Today’s match-up: “Second mortgage vs. home equity loan.”
This is an epic battle of the junior liens, which while subordinate to their first mortgage brethren, can still hold their own in a fight.
But in this duel, we’re probably doing more to “clear things up” than we are comparing two loan programs.
Are second mortgages and home equity loans the same?
You see, when it comes down to it, most second mortgages are home equity loans. And vice versa.
So if you hear someone talking about one or the other, they could be talking about the same thing.
This is further complicated by the fact that most home equity loans are HELOCs, or home equity lines of credit.
You should be, considering the ambiguity of it all…let’s break it down.
Second Mortgages, HELOCs, Home Equity Loans
A second mortgage is any home loan that is subordinated behind (comes after) a first mortgage.
This could be a HELOC or a home equity loan.
A HELOC, as previously mentioned, is a line of credit. In other words, you get a home loan with a certain line of credit, or draw amount, which you can use kind of like a credit card.
After the draw period, the amount drawn upon must be paid back during the repayment period.
*Note that while a HELOC is often used as a second mortgage, it can also be a stand-alone first mortgage, taken out by the homeowner when their mortgage is free and clear, or to refinance an existing lien.
Finally there’s the home equity loan, which can refer to both a HELOC or a closed-end second mortgage.
A “closed-end second mortgage” is a home loan that operates similarly to a first mortgage in that it’s a fixed amount, not a line of credit.
Unfortunately, many banks and mortgage lenders use the phrase “home equity loan” and “HELOC” interchangeably, adding to the confusion.
Read more: How to get a mortgage.