Home Equity Loan Information

"What are the differences between a second mortgage and a home equity loan?"

Author and financing consultant, Arthur Nourian said “The terminology can be confusing, but think of it this way… It is like asking the question, 'What is the difference between a fruit and an apple?' Second mortgages are like the fruit and home equity loans are like apples. Home equity loans are types of 2nd mortgage loans that involve a second lien on the property. Some 2nd mortgages are for a fixed dollar amount paid out at one time, in the same way as a first mortgage. As with firsts, such seconds may be fixed-rate or adjustable-rate.

The seeds of confusion were sown in the 1980s when second mortgages appeared that were structured as a line of credit rather than for a fixed dollar amount. Borrowers could draw up to some amount, when and as they pleased. These loans were called "home equity loans" or "home equity lines of credit", with the latter shortened to HELOC. They are always adjustable rate.

I now avoid the term "home equity loan" and use "HELOC" to refer to any 2nd mortgage loan structured as a line of credit. While most of these loans are second mortgages, some are first mortgages. If you own your house free and clear and you want a line of credit secured by a mortgage, that loan is a HELOC, even though it is a first mortgage. Similarly, if you use a HELOC to refinance your first mortgage, the HELOC becomes a first mortgage .

I avoid "home equity loan" because the term is now used to mean many different things. Some people in the marketplace use it as a synonym for second mortgage, while others use it as a synonym for HELOC. Regulators usually define it as a mortgage on a home that is used for some purpose other than to purchase the home. And the National Home Equity Mortgage Association defines it as a mortgage to a subprime borrower!

In terms of usage, a HELOC is most convenient when your cash needs are stretched out over time. A common example is a series of home improvements, one followed by another. College tuition payments is another.

Fixed-dollar seconds are best when you need all the money at one time. Many home purchasers take out such seconds to avoid mortgage insurance on the first mortgage.

When taking a fixed-dollar second, borrowers can select between fixed and adjustable rates, as they prefer. When taking a HELOC, they take an adjustable, and if they want a fixed they refinance into a fixed-dollar second after they have drawn as much as they intend to borrow on the line.

Benefits of Home Equity Loans

• No Equity Required
• Don't need to touch your existing Low Rate 1st Mortgage
• Tax Deductible
• Consolidating Debts will Lower your Monthly Payments

Program Highlights

• 125% Second Mortgage
• 1st Time Homebuyers OK
• Poor Credit OK
• No Verification Income Loans
• Self Employed Borrowers OK
• Interest Only Loan Options
• Home Equity Lines of Credit

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