There may come a time when you need some extra money. You may have repairs or additions that you want to do to your house. You may find yourself in an emergency situation and need access to money. If you own a home, there a couple of different ways you can access the equity in your home. Two of the most common ways to access that money are through second mortgages or home equity loans. There are some key differences of which you should be aware so you choose the right option for you.
What is a Second Mortgage?
A second mortgage is just what it sounds like – a mortgage that is in addition to your already-existing mortgage for your property. This type of loan is used often by homeowners. In some cases, banks consider a home equity loan to be a second mortgage. This is not true in all cases, so I want to focus on the difference between the two so you can make a sound decision. Second mortgages usually have aa higher interest rate because they pose a greater risk to the lender. These loans tend to have lower closing costs. A second mortgage is a lump sum that is paid out to the homeowner. It has a set interest rate and regular monthly payments. Regardless of what you do with the money, you repay the same amount each month. When you take out a second mortgage, you are paying two mortgages each month. You can also apply for a second mortgage at the same time as your first mortgage, although that is not as common. A second mortgage is riskier to a lender because if your house goes into foreclosure, the primary mortgage gets paid first. This often leaves the second mortgage unpaid, or the lender has to fight a lot harder to get it paid.
What is a Home Equity Loan?
A home equity loan can also be a fixed rate amount that is given to you in one lump sum. You pay back the home equity loan with monthly payments. You can only take out this loan after you have accrued some equity in your house. After you purchase your home and make payments, you begin to get equity in the house, which is the amount of the house you actually own. The more you pay on your mortgage and the longer you own the house, the more equity you have. A home equity loan can be taken out on your house even if you do not have a current mortgage. If you own your house, you can take a loan against it.