Second mortgages and home equity loans are perfect for homeowners needing money to make home improvements, eliminate debt, and so forth. These loans allow homeowners to obtain loans based on their home's equity. Home equity loans and second mortgages are better than refinancing because funds are received in a few days and homeowners are not required to paying huge fees.

What are Home Equity Loans and Second Mortgages?

Home equity loans and second mortgages provide homeowners with a lump sum of money. For the most part, homeowners obtain these loans when needing to make a big purchase or wanting to consolidate bills. Credit cards and consumer debts have ridiculously high interest rates. Although second mortgages have interest rates higher than the original mortgage, the rates are much lower than those offered on credit cards. Thus, homeowner may obtain a home equity loan to pay off credit cards. Home equity loans and second mortgages carry a fixed rate and have an average term of three, five, or seven years.

How Do These Loans Work?

In order to obtain a home equity loan, a property must have enough equity. Equity is the difference between a home's value and the amount owed to the mortgage company. For example, if a home is worth $120,000, and the amount owed to the mortgage lender is $80,000, the property's equity is $40,000. Therefore, the homeowner is permitted to receive a home equity loan up to $40,000. There are instances when a home equity loan and second mortgage is granted for more than a home's worth. These are 125% home equity loans. However, these loans carry a very high interest rate and the interest is not tax deductible

Homeowners receiving a home equity loan are required to make two mortgage payments. The first payment pays the balance of the original mortgage, whereas the second payment pays the balance of the home equity loan. Before applying for a second mortgage, homeowners should evaluate their finances and determine whether they can afford an additional monthly payment. Defaulting on a home equity loan or second mortgage could result in a lender foreclosing on a property.

To view our list of recommended home equity loan companies, visit this page: Recommended Home Equity Lenders Online.

Carrie Reeder is the owner of ABC Loan Guide, an informational website about various types of loans.