Many people will confuse second mortgages and home equity loans, which is not surprising. They are both a second loan, but they do differ in many different ways.
Second Mortgage:
With a second mortgage the borrower is lent a certain amount of money that is to be repaid on a set schedule. This type of loan will usually have a term of 15-30 years, like your traditional mortgage.
But this loan is much more of a risk on the lenders behalf, because when signing a second mortgage the borrower is agreeing to pay off their first mortgage balance before the second lender can be paid. This means that if the borrower happens to foreclose on their property their first lender will collect the proceeds until the mortgage is paid in full. With such a high risk, the lender will usually force a higher interest rate on the loan.
Home Equity Loan:
A home equity loan is a special type of loan that uses the equity in the borrowers home as collateral for the mortgage. But instead of lending in one lump sum amount, the HELOC acts like a credit card with the limit set at the loan amount. Only when the money is withdrawn from the home equity loan is their a monthly payment and interest charges based on the money taken out. For example, if you have a $75,000 loan and use $25,000 for a backyard pool, you will be making payments to your lender based on the $25,000 and still have $50,000 of available monies.
With a home equity loan, you turn the equity you have into cash. You can pretty much spend this loan however you please, whether its for home improvements, new car, wedding, or even paying off other debts you have acquired.
So when you look at it there are many similarities between a home equity loan and a second mortgage. If you need a lump sum of money, you may be better off with a 2nd mortgage because you will most likely obtain a better interest rate on the mortgage. If you need cash, but over a longer time frame, such as to pay for your children’s college tuition or to pay for home improvement projects planned over the next couple years, it is probably better to obtain a home equity loan. That way, you won’t be unnecessarily be paying interest on the money that you have not yet used and will only pay the bank when you actually withdraw the cash.
Hi,
I live in Seattle and have an 80 with Homestreet and a 20 with Wells Fargo for an 80/20 100% financed loan on our primary residence and only home. We have to relocate and our home is now lost just over 100k in value. Our 80 is for 220k and the 20 with wells is for 53k. We have not refinanced or taken any equity out at all. I talked to a real estate attorney who said neither can come after me for deficiency since I meet those requirements. We only have about 2k to our name so not sure what they would get any how. Is it true? I have heard that wells can sell the second to another and send me to collections-but the attorney we spoke to said we do not have to pay anything as we met the primary residence and didnt take out equity. What do you know about washington state or what have you heard? thank you very much.
Mike(Quote) (Reply)
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