2nd Mortgages versus Home Equity Loans

With all the terminology flying around the subject of real estate in general, and mortgages in particular, it is fairly easy to become confused. One of the most confusing areas is that of 2nd mortgages and home equity loans. The subjects themselves are not particularly confusing, but the terminology has become muddled and sometimes hard to sort out. This article does its best to provide you with a sense of clarity.

Defining a 2nd mortgage is the easy part. Simply put, it is any loan that puts a second lien on a property. They can be for a fixed amount, or involve a revolving line of credit. They can also be either fixed rate or adjustable rate. In short, 2nd mortgage is a wide-ranging term that can cover a large number of loans.

Home equity loan, on the other hand, is a term that is confusing and difficult to define. It means different things to different people. Some people consider a home equity loan to be synonymous with a “home equity line of credit,” or HELOC.

These loans are in the form of a revolving line of credit, and are always adjustable rate. While HELOCs are usually 2nd mortgages, they do not necessarily have to be, and are in fact sometimes used as first mortgages.

Some people involved in the mortgage use home equity loan as a synonym for a 2nd mortgage, and some use it as a synonym for a HELOC. This alone limits the terms usefulness and encourages some people to avoid the term altogether.

Adding to the confusion, regulators have a completely different definition for a home equity loan. They define it as any mortgage used for a purpose other than purchasing a home. Finally, the National Home Equity Mortgage Association (NHEMA) inexplicably defines a home equity loan as a mortgage to a sub-prime borrower.

All of the aforementioned definitions of home equity loan are valid. However, best to keep in mind that many mortgage-affiliated professionals use it within different contexts and for varying purposes. Therefore, prior to making a decision, it is suggested that you, the borrower, thoroughly clarify to your complete satisfaction any usage of the term.