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Finance for Homeowners

HELOC vs. Second Mortgage: What’s the Difference?

It’s a common question, what’s the difference between a HELOC vs second mortgage? The short answer is, not a whole lot aside from verbiage.

A second mortgage is another loan taken against your property that’s already mortgaged. You’ll be borrowing again, not to buy a home this time, but against your home by using the equity you’ve built up by making your mortgage payments and/or that’s accumulated passively due to a potential increase in property value.

home equity line of credit vs second mortgage

Mortgage vs Second Mortgage

Before we go further into the differences between a HELOC vs second mortgage, let’s examine how a first mortgage is similar and potentially unlike a second. Your first mortgage allowed you to borrow a large amount of money, in a single lump sum, to buy a home. In doing so, the lender will have placed a lien on your home which would allow them to seize the property should you not make your mortgage payments and/or default on that first mortgage.

A second mortgage is akin to the first in that once again a lien will be placed on your home but this time, only on the portion of your home that you’ve paid off and will borrow against — the equity you’ve built up that you’ll use as collateral for the second mortgage loan

With a second mortgage, you’re not borrowing to buy your home but instead, borrowing against the equity you have built up in your home. As with your original mortgage, the home will serve as collateral for the loan. It’s likely that multiple lenders will have liens against your home, one for the balance still owed on the first mortgage and another for the amount of home equity you have borrowed.

Why Consider A Second Mortgage?

A second mortgage provides you, the homeowner, with an influx of cash, for whatever purpose(s) that cash is needed. Maybe you want to consolidate credit card debt, pay off student loans or find the best way to finance home improvements. With a second mortgage, you may be able to access funds by borrowing against your home and using the equity you have accumulated in it.

The Difference Between a HELOC vs Second Mortgage

Now that you know how a second mortgage will differ from your first, and what you could do with the funds from it, let’s now take a look at the key differences when it comes to a HELOC vs second mortgage.

The difference, essentially, is language because your second mortgage will be processed as either a home equity loan or line of credit (HELOC). These are the two loan vehicles that can fund a second mortgage, and within the two there are differences.

Whereas a home equity loan will likely act similarly to your first mortgage, with a fixed monthly loan payment over a fixed number of years, taking a HELOC as your second mortgage offers the same kind of access to your home’s equity but with the added flexibility of making repayments only on the amount withdrawn from the line of credit. A HELOC also allows for continuous borrowing, as the amount accessible through the line of credit increases with each principal payment amount made.

The differences between a HELOC vs second mortgage may have been confusing but now you understand how the former can fund the latter. Find out more about how a HELOC works and how Prosper may help you access your home equity as a second mortgage.

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