A lot of the things my clients tend to be confused about, I understand. There is one big exception, and clearly, I am the one who is confused here; because I hear this more often than not. Clients come in and we talk about the mortgage on their house. Then, I ask about the 2nd mortgage. Oh, they don’t have a second mortgage. No, nope, no way. Well, what is this debt to Insert Name Bank? Oh, that is just a Home Equity Line of Credit. So, it is a second mortgage. No, no, it isn’t a 2nd mortgage, we don’t have a 2nd mortgage. It is just a Home Equity Line of Credit.
No. It is a second mortgage. (Well, this assumes that there is a first mortgage, but more on that later.)
Here is the scoop. A mortgage is actually the name for a type of lien on real property. If you borrow money — all at once, a little bit now and more later, received by cashier’s check or (shudder) by using a special credit card — however, you borrow it; if you borrow money and give the lender a lien on your home (or other real property) to secure payment of that loan — you have just given the lender a MORTGAGE LIEN.
There is no such thing as a Home Equity Lien, and if there were, it would just be a mortgage lien. Seriously. Google it. Now, is that what your friendly banker called it when you were looking for a little cash to catch up some bills or fix up the kitchen? Why, no. Calling it a Home Equity Line of Credit just sounds so much better than a 2nd mortgage. However, look at this carefully. A Home Equity Line of Credit is a loan that is secured by the equity in your home. That is a loan, secured by a lien on your home. How is that anything other than a mortgage?
Now, about that whole first and 2nd thing. Do you know the difference between a first mortgage and a 2nd mortgage? The first mortgage was recorded in County records first. Yep. That is it. Now, there can be some different consequences to a 1st and a 2nd mortgage. There have been times when the tax code gave preferential treatment for first mortgages. It is more common for first mortgages to include what is called an escrow account for the payment of property taxes and home owner’s insurance. There are reasons why those things are true, but they have more to do with the fact that a first mortgage is generally incurred to buy the home, it is generally larger than a 2nd mortgage and it generally fits certain standard terms — 15, 20 or 30 years with a fixed monthly payment (unless there is an adjustable interest rate).
Second mortgages can be more flexible. Frequently, a home equity line of credit has a flexible repayment period. The principal amount of the loan can change. It may be repaid in just a few years.
None of these things change the fact that a Home Equity Line of Credit is a loan that is secured by a lien on real estate (your home). That makes it a mortgage. If you already owe money on your home, then the home equity line is the 2nd mortgage (because you already had a first mortgage). If your home was paid for when you applied for the home equity line, then the home equity line of credit will be the first mortgage even though it may not include an escrow account or be for a fixed term or for any of those other common characteristics of a first mortgage.
The whole home equity line of credit thing has been a real marketing coup for local banks, and it all happened when they came up with this cool name – home equity line of credit. It just sounds so much better than a 2nd mortgage, but a rose by any other name is the same thing as a lien by any other name. Call it anything you want, it is still a mortgage.