Whether you expect them or not, dealing with life’s challenges and milestones can be much easier with extra cash on hand. Since money, unfortunately, doesn’t grow on trees, you need to look at realistic options for getting the money you need. Sometimes this money comes by way of a second mortgage or a home equity loan. While the names make the products seem very different, they are actually similar. A home equity loan is designed to be a secondary loan behind a first mortgage. It is less costly, but carries a higher rate. A second mortgage works similarly, but you essentially follow the same involved applicatinn process as you would on a primary mortgage. The benefit is a lower rate, but at a higher cost. Both have pros and cons, but your personal situation and preference that will dictate which is right for you.
Interest rate is the first thing you should look at when shopping for any type of loan, especially a mortgage or home equity. While every lender offers different types of rates for its products, an equity loan usually carries a higher rate. This is due to the fact that equities are designed to be secondary loans. Since your first mortgage-holder has the first shot at your property if your loan goes bad, a home equity loan is a higher risk to the bank. Because higher risk loans make lenders sleep less soundly, the rate will be higher. A higher rate equals higher payments which translates into less money in your pockets. Advantage – second mortgage.
Since equity loans are higher risk, the terms available are shorter than a second mortgage. The maximum term for an equity loan may only be 15 or 20 years as opposed to up to 30 for a mortgage. The longer term can be nice, but if you’re going to take a second mortgage for 30 years, you might as well just refinance and take cash out. Since you’re likely looking at a short-term loan, there isn’t a clear advantage with either loan.
Fees are where the equity loan outshines a mortgage. Most home equity loans have little or no out-of-pocket costs. A mortgage loan will start with an application fee and pile on the costs from there. You’ll pay to lock in your rate in addition to paying for an appraisal and other searches to determine that the collateral is valuable and free of any deficiencies. While the lower interest rate a mortgage offers may save you more in the long run, the upfront costs can prevent lower income borrowers from going that route, giving the win to equity loans in this category.
Rate, term and fees are the concrete differences between a second mortgage and a home equity loan. However, there are intangibles to consider. A home equity loan can be a fixed-term loan where you get all the money up front and immediately begin repayment or it can be a line of credit where you use the money as needed. A mortgage doesn’t offer this type of flexibility. Another consideration is turnaround time. The amount of searches and other due diligence that come with a mortgage loan can make the process significantly longer. Equity loans, on the other hand turn around quickly. The intangible round goes go equity loans.
Both loans types have pros and cons. If you need a loan quickly with lower upfront costs, then a home equity loan is your best bet. If you want a lower rate or a longer loan, go the second mortgage route. Ultimately, you must decide which loan is the best fit for you and your unique situation.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.