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Difference a HELOC and a home 2nd mortgage

Most Canadians often confuse a home 2nd mortgage with a line of credit home equity loan (HELOC). While both are associated with each other, they have their own benefits. But distinguishing one from the other should not be difficult.

A home 2nd mortgage is a type of home equity loan, whereas it has a fix payment like a car loan and duration of time where it’s going to mature. Equity refers to the difference between the current estimated value of your home and the amount you have paid towards the first mortgage, this is also called an LTV (Loan to Value). The calculation is simple, i.e. Mortgage amount divided into estimated home value = Percentage you owe towards your home. The amount you can borrow on a home 2nd mortgage is usually based on the difference between the current value of your home and the remaining principal balance on your first mortgage; thus, the LTV combined for the first and second mortgages most times shouldn’t exceed 85-90% as lenders aren’t comfortable to lend beyond this point. The second mortgage is an effective means of tapping into the remaining asset of the value of your home so that you can meet your financial needs for acquiring large purchases or renovations. Thus, avoid acquiring high interest unsecured debt like the one offered by credit cards.

Typically, one can get a home 2nd mortgage wherein the total Loan-to-Value (LTV) of your first and second mortgages equal to 85 percent of your home’s appraised value. On the other hand, there are lenders in almost all states/provinces that allow you to take out a second mortgage up to 90 percent of the appraised value of your home.

Second mortgages usually have a fixed interest rate that runs. Also, it is usually a 1- to 3-year Term which in most cases is an Open Mortgage. As with the initial loan, the rate of interest and lender fee for a second mortgage will be based on credit history, home value, employment (some lenders waive this) and their current first mortgage. The home 2nd mortgage may have a higher interest rate, but this varies based on the LTV and the above criteria.

Furthermore, second mortgages are also used to pay out a fixed sum of money to be repaid on an appointed schedule. People who are in an emergency situation usually opt for a second mortgage. This is because when you get approved for such a mortgage, you will receive a lump sum, which you can use for expenses like roof repairs and home renovations. You may also use the money from yourhome 2nd mortgage for expenses not entirely related to house expenditures, like school tuition, car repair, vacations, debt consolidation and other financial needs.

Home Equity Loans are different. This is used to refer to a line of credit home equity loan (HELOC). Line of credit home equity loan is often revolving and is similar to a Line of Credit or Credit Card, wherein the interest is charged on the amount you use. And the amount you are allowed to borrow is based on your creditworthiness, and your income to carry the HELOC. Like the second mortgage, a HELOC may be used for any type of expense, but anything that is paid back above the interest owed will be returned to the account and can be used again when needed.

Usually, home equity line of credit loans have a term of up to 5 years. If you sell your home before you have repaid the line of credit completely, it will be paid off from the proceeds of the sale or paid back from your own resources (savings). This feature is applicable to both the line of credit home equity loan and the second mortgage. In determining the limit of your HELOC, lenders examine your homes appraised value and start calculations at 75-80 percent of this value. They then deduct the remaining balance owed on your mortgage, and lend on the remaining amount from your home’s equity.

Your current financial needs will help distinguish the type of loan that is appropriate for you. For one-time expenses, you can opt for a fixed-rate second mortgage. But if you have a frequent need for extra money, a HELOC would be right for you. For more information, or questions please contact us and we will be glad to entertain your needs at no obligation or cost!

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