Knowing the Difference between a Second Mortgage and a Home Equity Loan

A Home Buying Article Contributed by Robert Scalia

What are the Differences between a Second Mortgage and a Home Equity Loan?

At first glance, it would appear that there's not much difference when it comes to second mortgage on the one hand and home equity loans on the other.

Many mortgage brokers and financial consultants would agree that the terminology is quite confusing. So here's a quick description of each to ensure that you know what you are shopping around for when it comes to both.

Second Mortgage Versus a Home Equity Loan. What's in a Name?

A second mortgage, by definition, is any loan that involves a second lien on the property. There are various types of second mortgages available out there. Some second mortgages are for a fixed dollar amount paid out at one time -which is not very different than with a first mortgage. As is the case with initial mortgages, such seconds may be fixed-rate or adjustable-rate.

The seeds of confusion were really sown in the 1980s. At the time, second mortgages began to appear that were structured as a line of credit rather than for a fixed dollar amount. This mean simply that borrowers could draw up to any given amount they wanted when and as they pleased.

These loans were called "home equity loans" or "home equity lines of credit." The latter was later shortened to HELOC. Both, it should be noted, were always of the adjustable rate variety.

Many professionals in the business have since taken to avoiding the term home equity loan altogether and now use the acronym HELOC to refer to any mortgage loan structured as a line of credit. While the majority of these types of loans are second mortgages, some are first.

Does the Term Second Mortgage Still Have You Confused?

Still confused.

Let's try to simplify this a little more. If you own your house free and clear and you want a line of credit secured by a mortgage, you will refer to that loan is a HELOC - even though it is a first mortgage. By the same token, if you use a HELOC to refinance your first mortgage, the HELOC doesn't become a second mortgage.

Despite this and the obvious differences between the two, people still use home equity loan as a synonym for second mortgage. Others still continue to use it as a synonym for HELOC. Regulators tend to define it as a mortgage on a home that will be used for some purpose other than to purchase the home, while the National Home Equity Mortgage Association defines it as a mortgage to a sub prime borrower. Whatever that means.

There may still be confusion over the semantics, but there is little debate over each loan's benefit. In terms of usage, the HELOC remains the most convenient loan when your cash needs are stretched out over time, perhaps followed by a series of home improvements or a string of college payments made in the span of a couple of years.

Clear enough, already?