Homeowners who want to free up money to consolidate debt, pay for routine maintenance, or fund a major renovation project have a variety of borrowing options available to them. In addition to lines of credit and unsecured loans, homeowners can also choose to borrow against the value of their house — even if they are still paying off their first mortgage.
There are several ways to do this, and it is not uncommon for people who have never done it before to be confused about the differences between different types of loan. What is mortgage refinancing? Should you choose a second mortgage vs. home equity loan? If you have a low credit score, will this impact what options are available?
This post will explore the differences between a home equity loan vs. second mortgage, two similar-but-distinct terms that are often used interchangeably. It will also touch on how these financial instruments can be used to responsibly leverage home value, and how Burke Financial can help you find the best loan for your situation.
What is Home Equity?
In order to understand home equity loans vs. second mortgages, it is first necessary to explain what home equity is. Put simply, home equity is the value of the home owned by the homeowner. It is usually expressed as a function of the current market value of the property minus the total value of the mortgage.
For example, if you own a house that is currently worth $700,000, and you still have $400,000 to pay on your mortgage, your home equity is $300,000 — basically, home equity is the amount of money you would have after selling your house and paying the bank the rest of what you owe.
Home equity fluctuates over time, and is dependent on a few factors. In a city like Toronto, where housing prices are increasing by leaps and bounds, homeowners quickly gain a substantial amount of equity simply due to market forces. But equity also goes up as the mortgage decreases: over time, your monthly payments add up to you owning a substantial portion of the property outright.
This equity is an asset, and while people still tend to think of it as something that will yield a major return only years down the road when the property is sold, the truth is that this asset can also be a useful source of leverage in the short term. This is where second mortgages and home equity loans come into the picture.
Second Mortgage vs. Home Equity Loan
Just about everyone who buys a home in Canada gets a mortgage. Typically, these mortgages lock in at a fixed rate of interest for three to five years with a 20% down payment, and may last anywhere from 25 to 30 years.
But as the homeowner’s share in the property rises, it is possible to take out a private second mortgage based on the amount of equity. This second mortgage essentially provides a significant amount of liquid capital (as much as 85% LTV in some cases) that can be used for a variety of different purposes, including:
- Debt consolidation
- Home repairs
- Car payments
Because this second mortgage is a secondary obligation, to be paid off after the first mortgage in the case of a default, the interest rate is a little higher. But it is still far more competitive than most forms of unsecured credit.
The best way to understand a home equity loan is as being a particular type of second mortgage. One home equity loan definition might be that it is a second mortgage received as a quick lump sum payment.
Second mortgages can be structured in more than one way, with some being paid out in the form of a Home Equity Line of Credit, or HELOC, which can be drawn on as needed. But with a home equity loan, you receive the full amount upon approval, making them the ideal option for homeowners who need to cover a large, one-time expense or who are looking to consolidate a number of debts into a single lower-interest payment.
How to Apply for a Second Mortgage or Home Equity Loan
There are a variety of ways to apply for a second mortgage in general or a home equity loan more specifically. Banks and other financial institutions may offer these as part of their service, but it is also possible to secure both of these types of loan through a mortgage broker.
For homeowners who need emergency funds, mortgage brokers like Burke Financial are the best way to quickly leverage your home equity into a payment for the simple reason that we make it easy to apply for a loan and can get you the money within as little as two business days.
But even if you don’t need the money immediately, mortgage brokers still offer superior service due to the fact that we can connect you with a greater number of lenders, ensuring that you take advantage of today’s appealing interest rates to get the best possible deal.
Regardless of what kind of credit score you have, Burke Financial can find you the best loan at the most appealing rate. Because we act as a mediator rather than selling our own financial products, you can be sure that we are working solely on your behalf.
If you’re trying to decide how best to borrow against the value of your home the key thing to understand about second mortgage vs. home equity loan is that in most cases, they refer to the same thing. What matters more is what kind of a deal mortgage brokers can get you, which is why it makes sense to work with an award-winning firm like Burke Financial.
Start your application today and discover the life-changing power of home equity!