Question:

How is a mortgage vs home equity loan different?

Answer:

There is no difference comparing a mortgage vs home equity loan. A home equity loan is in essence any kind of loan using your home as collateral. First and second mortgages are all home equity loans.

However, a first and a second mortgage are traditionally used to denote a primary and subordinate lien on real estate property while a home equity loan is most often used to denote HELs and HELOCs - Home Equity Loan (HEL) and Home Equity Line Of Credit (HELOC). These are usually loans taken in junior (second or third) position even though it is possible to use them to purchase real estate and come as loans in first lien position.

Second mortgages are often associated with home equity loans.

Many people mistake second mortgages with HELs, and they are not completely wrong. Second mortgages and Home Equity Loans are usually fixed-rate, closed-end, one-time credit advances and come in a second lien position, while a HELOC is an adjustable rate loan used on a revolving basis - much like a larger credit card, but with much lower rates.

Second mortgages and home equity loans and lines of credit are easy and cheap way to cash equity.

Whenever your first mortgage LTV goes down, you could always use the equity in your house to fund a big ticket purchase, or invest, or make home rehabs, or consolidate debt with a second mortgage/home equity loan/line of credit. Previously, that is, before the subprime mortgage crisis, lenders would allow no equity (over equity) loans of up to 125% combined LTV (that is, the sum of all your home loans divided by your property value). However, currently most second mortgages and home equity loans allow for no more than 90-95% CLTV.

Also, depending on current market condition a piggy back loan (a first and a second mortgage combined for a home purchase to avoid paying PMI) often uses either a traditional second mortgage, a HEL or a HELOC. Typical piggyback/combo loans will use 80/20, 80/15/5 or 80/10/10 combinations of loans in a first and second lien position, and downpayment to avoid private mortgage insurance.

Since second mortgages, HELs and HELOCs all share the same tax deduction benefits borrowers simply need to compare interest rates and use those quite interchangeably, especially the standard second mortgage and the home equity loan (HEL).

Mortgage rates hit their lowest since 1955. Ask the home loan experts we recommend Quicken Loans how to take advantage of them.
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