Since a home equity line and a second mortgage are both attached to your home, many people have difficulty telling the two loans apart. In reality both are additional mortgages on your home. The difference between the two is how the loans are paid out and handled by the bank.
A home equity line is a revolving line of credit. The bank opens the credit line and the equity in your home guarantees the loan. A revolving line of credit means that you can borrow up to a certain amount, and make monthly payments. The payments are determined by how much your currently owe on the loan. Once you have paid off the money you can borrow it again without applying for another loan. It is similar to a credit card in that way.
A second mortgage is also attached to your home. It operates differently though. The loan is paid out in one lump sum at the beginning of the loan. The payment amount and the term (length) of the loan are already set. Once the loan is paid off, then you would have to open up a new loan to borrow against the equity in your home again.
People use both of these types of loans for a variety of reasons. One common reason is debt consolidation. However it is risky to move unsecured debt, such as credit card debt to a secured loan. It puts your house at risk if you are unable to make payments for any reason. Additionally it cuts into the equity that you are building on your home.
In a debt payment plan, it is important to put a second mortgage or a home equity line in with the rest of your consumer debt. It should be paid off before you start investing seriously, because the interest rates are generally higher than most first mortgages. It does not make sense to invest when you are paying that much in interest each month.
Finally many people used to rely on home equity line as an emergency fund. However, banks are beginning to close home equity lines, even if they have been in good standing in the past. Instead you should work on saving between three to six months of income to cover the emergency that may come up.
