Second Mortgage and Home Equity Loan

A second mortgage and home equity loan are two virtually synonymous terms with both meaning pretty much the same thing. The second mortgage and home equity loan have risen in popularity ever since the turn of the century and they both reached a climax in 2007 until the housing bubble crashed in 2008 and the economy crumbled along with the entire real estate market.

Up until this point people would take out what is classically called a second mortgage on their property in the form of a home equity loan so that they could extract the equity built up in the property as cash in the form of a bank note against the property. In plain English this meant that homeowners could access the equity that had built up in their property while home values were still rising at such significant rates. The majority of the people that had taken out a second mortgage on their property had no idea that there was a housing bubble and that there was a good chance that home values were going to tank so they just kept on borrowing—and that usually came in the form of home equity loans or home equity lines of credit, and even home refinancing loans.

Once home values began to tumble, people with second mortgages and home equity loans began to worry because if the value of their home dropped below the level of financing they had out on the property then they would be what is called “upside-down” in their property and they would therefore owe more than what the home was worth. This has actually happened to numerous homeowners over the past two or three years, and until home prices go back up the individual is pretty much stuck paying for the financing that is probably worth more than the property.

There is really no difference between a second mortgage and home equity loan and the terms can be used today to convey pretty much the same meaning. A second mortgage can include other kinds of liens against the property besides the home equity loan but in reality the second mortgage and the home equity loan are pretty much the same thing.

This being said, the home equity loan took over the real estate industry from around the late nineties up until the aforementioned housing bubble crash that took place in 2008. The home equity loan became so popular due to the speed at which home values were rising and many home owners couldn’t resist taking out a second mortgage on their property so that they could use their home as a virtual ATM machine.

Banks and lending institutions made the application process simple and easy for almost any homeowner that had equity built into their property, and it was not uncommon for homeowners to take out multiple home equity loans in only a three to four year period so that they could access the equity that may have built up over those years. You ended up getting homeowners that were way overleveraged in their properties and that were in essence speculating that home prices would continue to go up each and every year.

Once home values began to fall then people were left with upside-down properties that had no chance of building up more equity. People couldn’t make their payments on the loans they had against their properties and for many this left only one option—foreclosure. The foreclosure mess that has gripped the nation over the past few years is in part due to the overall prevalence of the home equity loan and the fact that people couldn’t resist getting that cash when they could.

We are now experiencing the fallout of the entire thing, and while home equity loans are still available on the market they are nowhere near as popular as they were before this housing and economic crisis. If you are upside down in your property and still have a second mortgage then your best bet is to keep paying both mortgages until you can reach an agreement with one or all of your lenders. This is becoming more of a viable option for many homeowners in this kind of situation, so don’t hesitate to contact your lender to see if you can strike a deal.