- A home equity loan is an umbrella term used to describe a home with a mortgage/loan secured against it
- A line of credit is a re-advanceable type of home equity loan that is secured against real estate, meaning you borrow against and pay down an approved limit
- A second mortgage is simply a mortgage or line of credit registered after your first mortgage. Lenders have specific terms for this type of mortgage
Understanding home equity loans
Today, we chat about the differences between home equity loans, lines of credit, and second mortgages. We often hear these terms used in the mortgage industry, and they can have significant impacts on borrowers and their financial situations.
You can also review the complete private mortgage guide for more detailed information!
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:00] Today, we are going to talk about the difference between a home equity loan, line of credit, and second mortgage. Let’s go.
Home equity loans
Chris: [00:00:18] So first, let’s talk about home equity loan. There is no real definition of what a home equity loan is, but it is an umbrella term, so your mortgage at the bank is a home equity loan. It’s a type of home equity loan. A line of credit is a type of home equity loan, and a second mortgage is a type of home equity loan. So it is really the generic term which says that you have a home. It has equity and there’s a loan that’s being secured against it. In modern terms, we use a home equity loan to define a specific type of mortgage, usually a private mortgage, where a loan is provided, secured by the real estate, and is driven by the amount of equity in a house, not by what we would call the personal covenant of the of the borrower, meaning having qualified income and good credit. So home equity loan: very generic term. In modern terms, you might hear home equity loan being referred to as a private mortgage. Hope that helps.
Lines of credit
Chris: [00:01:29] Secondly, let’s talk about lines of credit. So a line of credit is a type of home equity loan that is secured against real estate. And the most defining feature of a secured line of credit is that it is re-advanceable. So there’s an approved limit, you can borrow against that limit, and each month you pay it down. Whatever you pay down can be borrowed back again against that line of credit. In terms of line of credit providers, it’s typically a product offered by your bank or what we would call A lenders. So in the world of private mortgages or borrowers that have less than perfect income, credit, or some other issue associated with their mortgage application, it’ll be very difficult to apply for a secured line of credit. So hopefully that helps: line of credit, re-advanceable secured against the equity of your home.
Chris: [00:02:32] Now let’s talk second mortgages. So mortgages are defined by their ranking. We have first mortgages, second mortgages, third, fourth, et cetera. And what determines the ranking of a mortgage is really as simple as the order in which they’re registered. So you have your first mortgage is what probably ninety seven percent of the population has who have mortgages would be a first mortgage and first position. And then behind that first mortgage, you can have a second mortgage. A line of credit can be in second position. So that’s really what we’re talking about when we say second mortgage. Now, when it comes to private second mortgages and the tool of it being a very useful tool for consolidating debt or helping in a specific circumstance, second mortgage is very defined, goes behind your first mortgage, has set terms and rules that’s registered by a lender and is a very useful tool in specific circumstances, which I’ve covered in previous videos.
Chris: [00:03:45] My name is Chris Molder. I am a Toronto based mortgage broker. For the last two decades, I’ve been helping home borrowers just like you navigate the world of private mortgage financing. If you have any questions or concerns or would like more information about private mortgages, I am just a phone call or an email away. Bye for now until next time.
Need more help or information?
I encourage you to check out the complete private mortgage guide on my website, where I cover all aspects of this type of mortgage financing.
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