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Second Mortgage or Home Equity Line of Credit?

17 July 2012

Second mortgages and home equity lines of credit can be a real help to homeowners when they need some extra cash. But what exactly is the difference?

The two are very much related, as a home equity line of credit, or HELOC, is a type of second mortgage. A second mortgage is any mortgage that you take out on your home in addition to your first mortgage. This includes HELOCs, home equity loans, and private mortgages. If you still owe money on your first mortgage and you borrow money against the equity in your home, that is a second mortgage – no matter the type you take out. However, when most people hear the term “second mortgage” they often think of a home equity loan. And there are some differences between a home equity loan and a HELOC.

A HELOC is a revolving line of credit that lets you borrow up to 80 per cent of the equity you’ve built up in your home. HELOCs are almost always based on a variable rate of interest, which means that as the interest rates change, so too will the amount you’re paying on your HELOC. Luckily, the interest rates have been kept at their historic lows for almost 2 years now. That interest is very important, because it might be the only feature of the HELOC that you have to pay from month-to-month until the end of the loan. And, you will only be charged interest on the amount of principal that you’ve already withdrawn from the loan. Once the loan is finished, you’ll then need to repay any remaining interest you owe, as well as the principal amount that you originally took out with the mortgage.

A home equity loan on the other hand, works very similarly to your first mortgage. You will apply for a certain amount (again, this can be up to 80 per cent of the equity you hold in your home) and you’ll receive that full amount as a lump sum once your home equity loan is approved. The interest on these loans is almost always fixed, and you’ll have to repay a little bit of both the interest and the principal every month until it is all paid off.

When you need extra cash, and you want to tap into that home equity that’s just sitting there, not working hard for you, come see us at CMI. We are the best brokers in Toronto, and we can explain all the different second mortgages available, and help you decide which one is best for you!

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