A second mortgage is a loan taken after the first mortgage, and it is secured against the same assets as the first. It is based on the amount of equity or interest or ownership you have in that property, thus based on the difference between the current value of the property and the amount you owe on it. Second mortgages are arranged for various purposes, such as financing home improvements, college tuition fees, debt consolidation or other emergency expenses. If you have gathered enough equity, another option is to refinance your home and borrow funds in excess of your current loan balance.

Usually, a second mortgage carries a higher rate of interest than a first mortgage. So if interest rates are low or start decreasing, refinancing becomes a more appropriate option. Since underwriting guidelines are less strict for second mortgages, it usually takes less time and effort to get a second mortgage than to refinance a loan. Also, a second mortgage may have low transaction costs, so despite higher interest rates on second mortgages, in the long run they may turn out to be less expensive than refinancing.

Home equity loans are simple interest, fixed rate home loans, secured by a lien in second position on the legal title of your property. Home equity is defined as the difference between the current value of your home and the total amount you owe on the property. At the close of escrow, home equity loans have a one-time payment of the full amount of the loan, as opposed to home equity credit lines, which have an open account for periodic withdrawals. The difference is that the home equity loan is a second loan against your home behind the first mortgage that you already have. The closing costs for a second mortgage are lower than closing costs on a first mortgage loan. The rates on home equity loans are fixed rates that are slightly higher than fixed rates on first mortgages.

Second Mortgage Loans vs. Home Equity Loans, which is for you? Its not always easy to tell. Its even harder with the confusing terms "second mortgage" and "home equity loan." Folks new to the mortgage lending world usually mistake these two. Mainly because a second mortgage is a type of home equity loan. Basically however, home equity loan is used to describe a home equity line of credit, or HELOC. To take advantage of the equity that is built up in your home, you will need to decide if a HELOC or a true second mortgage is best for you. The most prominent difference between second mortgages and home equity loans is the maximum loan to value allowed, which can be as high as 125% of value.