It’s
not surprising that some homeowners confuse the terms “second mortgage” and “home
equity loan.” After all, a second mortgage is a type of home equity loan.
But more often than not, home equity loan is used to describe a home equity line of credit, or HELOC. If
you want to take advantage of the equity that you have built up in your home,
you will need to decide if a HELOC or a true second mortgage is best for you.
Before
discussing which might be better for your purposes, let’s look at some of the
basics of each. A second mortgage pays out a fixed sum of money to be repaid on
a set schedule, like your initial mortgage. Unlike refinancing, the second
mortgage does not supersede the first mortgage. Second mortgages are usually 15
to 30 year loans with a fixed rate of interest. Like the initial loan, the rate
of interest and points (if any) will be based on your credit history, the price
of the home, and the current interest rate. While the interest rate on a second
mortgage may be a little higher, the fees are generally lower.
HELOC,
however, is similar to a credit card, and it may even include a credit card to
make purchases. Like credit cards, interest is charged, and the amount you can
borrow is based on your credit worthiness.
To
determine the limit of your HELOC, lenders will look at the appraised value of
your home, you may have access to up to 80% of the appraised value or purchase
price of your home (whichever is lower), less any prior outstanding mortgage
charges. As your mortgage balance decreases, your available rate increases.
Your
current financial needs will help to determine which type of loan is right for
you. If you need money for a one-time expense, such as building a new deck or
paying for a wedding, you would probably opt for the fixed-rate second
mortgage.
But
if you forecast a recurring need for extra money, such as tuition payments, you
may prefer a HELOC. A line of credit allows you to borrow when you need the
money and, if you pay back the amounts quickly, you can save money over a
second mortgage. You also need to consider your spending habits. If having
another credit card in your wallet would temp you to spend more often, then you
are not a good candidate for a HELOC.
Once
you make an initial determination about which loan might be right for you, you
will need to discuss the details with a professional. We recommend that you speak with an
independent mortgage broker with experience in this sector to help you make the
most effective decision among the products available.
Source: AllBusiness.com
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