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Homeowner Loans and Second Mortgages: What’s the Difference?

There are a variety of different ways you can apply for finance using your property. Two of the most common are homeowner loans and second mortgages. Homeowner loans are a form of secured loan using your property as collateral, and are useful for those looking for immediate and relatively small sums of cash. Second mortgages are more substantial and help those with a poor credit history. This guide will be a starting point in this process and will help you to compare loans on offer.

In this
guide:

What is a homeowner loan?

A homeowner loan examines the value of your property when applying for a loan. This is why they’re also referred to as a ‘home equity’ loan. Homeowner loans are a type of secured loan that puts the property as collateral for the lender. When applying for these types of secured loans lenders will look at your credit score but tend to be more willing to lend to those with poor credit scores, because they have the property as security. Although this may be attractive, it means that if you fail to make the payments then they have the ability to repossess your house.

What is a second mortgage?

When buying a home, most people will take out a mortgage in order to pay for it. A mortgage is a secured loan that is paid over a long period of time in relatively small instalments. The house again is used as collateral and can be taken by the bank if you fail to meet these payments. A second mortgage is essentially the same except that it takes second place to your first mortgage (which has priority of payment). You can only get a second mortgage if you have home equity, in other words if you own a percentage of the property outright, and it’s not fully under mortgage. This means if you have bad credit, you can still get a second mortgage but the interest rates may be higher.

Homeowner loan or second mortgage?

There are advantages and disadvantages to each type of loan, you will therefore need to compare loans when assessing your own financial situation.

  • Second mortgages are useful if you are struggling with a form of unsecured borrowing, like a personal loan.
  • However, a secured loan is a more immediate payment and is good for those who don’t mind taking a risk on the repayments.

When would I need a second mortgage?

There are a variety of reasons why you might feel a second mortgage is the right choice for you.

  • If your credit rating has fallen since you took out your initial mortgage, a second mortgage allows you to avoid paying more interest on your entire mortgage, which would happen if you tried to remortgage.
  • It’s also useful if your mortgage has a high early repayment charge, making it overall cheaper for you.
  • Second mortgages are a good tool to use for general financing needs when you do not need to fully remortgage. If you are self-employed, it may be hard to get credit so a second mortgage can be easier as you can use equity as collateral.

When wouldn't I need a second mortgage?

As with any loan, borrowing a large sum of money is risky and has consequences if you fail to make the repayments.

  • If you are only just managing to pay your initial mortgage, there is a stronger chance you could lose your home if you can’t pay either your first or second mortgage repayments.
  • If you are using the second mortgage to pay off unsecured debts, such as credit cards, you will most likely end up paying more interest in the long run. In changing your debt from unsecured to secured, you are putting your assets (your house) at risk as well.
  • Loan applications may affect your credit score. The best way to compare is to run a soft search, where you will be given a list of loans available.
  • Use as much of your own money as possible. As a general rule of thumb, the less money you borrow the better.

What happens if you move house?

Whether you have a homeowner loan or a second mortgage you will have the same options when it comes to moving home. You can either transfer the loan to a new property, which is more straightforward but runs the risk of an increase interest payments. Or, you can pay off the loan through the sale of the house or borrowing more.

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Michael Quinn
Author: Michael Quinn Last Updated: 10/07/2019
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