Comparing a Home Equity Loan to a Second Mortgage

A home-equity loan and a second mortgage are very similar. Both use the equity you have in your existing property as collateral for a new debt. The main differences between the two options are in the structures of the liens and the payment schedules.

Lien Structure

A second mortgage carries with it certain implications for a lien on the property. Since it is a mortgage debt, it is technically a senior loan with as much hold on your property as your first mortgage. The lien will be filed with the county, and a default could lead to foreclosure. A home-equity loan is typically subordinate to the existing mortgage. The home-equity lender would have to buy your primary mortgage in order to pursue foreclosure on your property.

Payment Schedule

Both forms of debts are installment loans. This means the loan is issued in a lump sum paid off with multiple, set payments throughout the course of the year. The key difference is a second mortgage tends to be longer, representing more payments over a longer period of time. Home-equity loans are typically issued in smaller amounts. It is common for a homeowner to take more than one home-equity loan during the course of ownership; this is not common with second mortgages.

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