Are you planning to get cash quickly? Do you have some amount of equity in your home? You may want to explore the option of a second mortgage or home equity loan.
When it comes to taking out a loan against the equity in your home, you have two main options: a second mortgage or a home equity loan. Both have their pros and cons, so it’s important to understand the difference before making a decision.
So, which is the better option for you? It depends on your individual circumstances. If you need the money right away and you don’t mind incurring some extra costs, a home equity loan may be the way to go. However, if you want to save money in the long run, a second mortgage could be a better choice.
In this article, we’ll break down what each type of loan entails and compare the pros and cons so that you can make the best decision for your needs.
Table of Contents
• What is a Home Equity Loan
• How Does a Home Equity Loan Work
• What is a Second Mortgage
• Second Mortgage Requirements
• Pros and Cons of Home Equity Loans
• Pros and Cons of Second Mortgages
• Is Home Equity Line Of Credit Considered a Second Mortgage
• 2nd Mortgage vs Home Equity Loan
• Can I Sell My House With A Second Mortgage
What is a Home Equity Loan?
Home equity is the portion of your home that you own outright or the difference between your home’s market value and any outstanding mortgage debt.
A home equity loan is a loan that’s secured by your home equity. If you’re approved for a home equity loan, you’ll receive the money in a lump sum and then pay it back over time with interest. The interest rate on a home equity loan is typically fixed — meaning, it won’t change over the life of your loan.
For example, let’s say you own a home worth $250,000 and you have a $150,000 mortgage balance. That means you have $100,000 in equity. If you’re approved for a home equity loan, you could receive a lump sum of cash equal to that $100,000. You would then pay back the loan over time, with interest, until it’s paid off.
How Does a Home Equity Loan Work?
If you have equity in your home, you can apply for a home equity loan from a bank or other financial institution.
The amount of money you can borrow with a home equity loan is based on your home’s value and the amount of equity you have. Equity is the portion of your home’s value that you own outright — meaning, it’s not being used as collateral for any outstanding debt.
The amount of money you can borrow with a home equity loan also depends on your credit score and income. Lenders will want to see that you have the ability to repay the loan, so they’ll look at factors like your employment history, income, debts, and credit score.
What is a Second Mortgage?
A second mortgage is a loan that’s secured by your home equity also — meaning, the value of your home minus any outstanding mortgage debt. If you default on the loan, your lender could foreclose on your home.
The interest rate on a second mortgage is typically higher than the rate on a first mortgage. But, if you have good credit, you may be able to get a lower rate than you would with a home equity loan.
You can use the money from a second mortgage for anything you want, including home improvements, consolidating debt, or paying for college tuition.
Second Mortgage Requirements
Generally, second mortgage and home equity loan requirements are the same. Here are a few things lenders will look at when you apply:
- Equity in your home
- Good credit score
- Steady income
- A debt-to-income ratio below 43%
- Homeowners insurance
- Appraisal
- Loan origination fee
- Title insurance
- Closing costs
- Prepayment penalty
Pros and Cons of Home Equity Loans
- Home equity loans have lower interest rates than other types of loans.
- Home equity loans offer a fixed interest rate, so your payments will stay the same each month.
- You may be able to deduct the interest you pay on a home equity loan from your taxes.
- Home equity loans can be used for anything, including home improvements, consolidating debt, or paying for college tuition.
- You’ll need to have good credit and a steady income in order to qualify for a home equity loan.
- If you default on a home equity loan, your lender could foreclose on your home.
- Home equity loans typically have high origination fees and closing costs.
- You may be required to take out homeowners insurance if you have a home equity loan.
Pros and Cons of Second Mortgages
- The second mortgage typically has lower interest rates than other types of loans.
- You may be able to deduct the interest you pay on a second mortgage from your taxes.
- You can use the money from a second mortgage for anything you want, including home improvements, consolidating debt, or paying for college tuition.
- If you default on a second mortgage, your lender could foreclose on your home.
- Homeowners insurance is typically required if you have a second mortgage.
- Loan origination fees and closing costs are usually high with a second mortgage.
- You’ll need to have good credit and a steady income in order to qualify for a second mortgage.
Is Home Equity Line Of Credit Considered a Second Mortgage?
A home equity line of credit (HELOC) is a type of home equity loan that works like a credit card. You can use it for expenses up to a certain limit, and then you pay it back over time with fixed monthly payments.
A HELOC is considered a second mortgage, but there are some key differences:
- HELOCs have variable interest rates, while second mortgages have fixed interest rates.
- HELOCs typically have lower interest rates than second mortgages.
- With a HELOC, you only pay interest on the money you borrow. With a second mortgage, you must pay interest on the entire loan amount even if you don’t use all of it.
2nd Mortgage vs Home Equity Loan
The best way to decide whether a second mortgage or home equity loan is right for you is to compare the interest rates, fees, and terms of each option. You should also consider how much money you need and how you plan to use it.
If you need a large amount of money for a one-time expense, such as home renovations, a second mortgage may be the better option. You’ll have fixed monthly payments and you’ll know exactly how much you’ll need to pay back over time.
If you only need a small amount of money or you plan to use it for ongoing expenses, such as consolidating debt, a home equity line of credit may be a better option. With a HELOC, you only pay interest on the money you borrow and you can access funds as you need them.
Can I Sell My House With A Second Mortgage?
Yes, you can sell your house with a second mortgage. You’ll need to pay off the entire loan balance before you can close on the sale. If you can’t pay off the loan, you may have to negotiate with your lender to try and get them to agree to a short sale or deed in lieu of foreclosure.
If you’re having trouble making your mortgage payments, you may want to consider selling your house before it goes into foreclosure. This will allow you to pay off your debt and avoid damaging your credit score.
If you decide to sell your house, Colorado Cash Buyers can help you. We buy houses for cash, so you don’t have to worry about getting a loan or dealing with a bank. We’ll make you a fair offer and close on the sale quickly, so you can move on with your life. Contact us today to learn more!