Is a Second Mortgage the Same as a Home Equity Loan?

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What are second mortgage loans?

Also called a home equity loan, it’s a home loan that you borrow while you’re still paying the original mortgage back. You take the second mortgage loan against your already mortgaged property. In other words, you’re refinancing your mortgage to get extra cash for a rainy day, like buying a vehicle.

1. Is a second home mortgage right for you?

Bear in mind that you already have an existing loan. So, if you want to apply for the second one, the loan approval will depend on your home’s equity. Equity is the difference between your outstanding mortgage balance and the current market value of your property.

When you’re borrowing the second home loan to meet other financial needs, you’re doing so against your home’s equity. It also means that your lender needs to reconsider your credit score to assess your ability to carry an extra debt burden.

If your lender approves the second loan, you’ll receive it as a lump at its beginning. According to the mortgage agreement, you’ll repay it over a certain period at a variable or fixed rate. Note that should you need another second loan, you must pay the first one-off.

Another issue to consider is that you still need to clear the original mortgage if you default on the home equity loan. Because of this, interest rates on second mortgage loans may be quite high.

2. What are the pros and cons of refinancing your mortgage?

Depending on the loan type you want, refinancing has several benefits.

Benefits

• Can cash out your equity to meet your urgent financial needs.
• The payment period may be short.
• Monthly payments are low.
• Interest rates might be low.

Drawbacks

Refinancing loans have also closing costs like the first mortgage, including

• Attorney costs
• Underwriting fees
• Survey fees
• Lender origination or administration
• Title services
• Credit report fees
• Appraisal fees

In summary, second mortgage loans are secured against your home equity and are ideal if you’re looking for a lump sum to fund your expenditure like buying some asset. But there are costs that you’ll pay as you apply for them.