QandAs: Loans

What is the difference between a Home Equity Loan and a Second Mortgage?

Answer:
Homeowners often confuse a home equity loan with a second mortgage. To qualify for a home equity loan, borrowers must have ample equity in their property, and they must be able to afford the additional monthly expense.

Although a second mortgage is a type of home equity loan,

not all home equity options are “true second mortgages.” A second mortgage is essentially a loan that involves a second lien on the home. Today, a home equity loan has different meanings. It can be a loan wherein borrowers receive a one-time payout from a lender, or it can be structured as a line of credit. The latter option is rarely referred to as a second mortgage, and some mortgage lenders solely use the term “home equity loan” to refer to a home equity line of credit. Borrowers who want a lump sum would have to apply for a second mortgage.

Another reason why lenders make a distinction between home equity loans and second mortgages is because a home equity loan doesn’t necessarily involve a second lien on the property. After paying off their home, an owner can choose to tap into their equity. In this case, a traditional home equity loan or a home equity line of credit would be considered a first mortgage.


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