Do you need cash? If you own your home, you might be living in your solution. Your home’s equity can be used as a monetary resource when needed.
Many people around the country have quite a bit of net worth built-up in their homes. There are many reasons that you may want to use this equity to your advantage, such as:
When people need to tap into their home equity, the two most common ways to do this are a home equity line of credit (HELOC) or a second mortgage. Depending on the situation that you find yourself in, one may be a better option than the other.
Heloc and second mortgage options have pros and cons, so you need to do your homework and choose the best route for you.
Understanding the Difference Between A HELOC and a Second Mortgage
How Is A Second Mortgage Different
Should You Choose A HELOC Or A Second Mortgage?
Where to Get a Second Mortgage
What To Consider: Advantages & Disadvantages of Borrowing Against Equity
Understanding how a Home Equity Line of Credit (HELOC) or second mortgage works will help you make an educated decision when considering the options.
A HELOC, or home equity line of credit, allows the homeowner to use their home equity as a line of credit.
This type of loan is often compared to a credit card, which enables a homeowner to use equity as a line of credit. You can use as much or as little of your home’s extra value as you need.
If you wish to go with a HELOC, there is a process. You’ll need to appraise your home to help determine how much credit is available. Afterward, your credit history, loan payment history, and debt-to-income (DTI) ratio will be considered.
During the application process, you and your lender will set a borrowing limit and determine the interest rate. It’s noted that your home should have at least 20% equity in order to go through with a HELOC.
Many HELOC options have variable interest rates, which could affect your payments. Paying close attention to these terms will help you determine your repayment amounts.
A second mortgage is similar to a HELOC as they both use the equity in your home as collateral. The main difference is that a second mortgage gives you a lump sum, whereas the HELOC option is a line of credit.
Your lump sum comes as a single payment that you repay over time, unlike a HELOC, where you can borrow, repay, and borrow again. With a second mortgage, you will make fixed-rate payments just like your first mortgage, compared to HELOC, where you have a line of credit and a minimum amount due each month.
When To Choose a HELOC: Before we go further, it should be noted that a HELOC is still technically a second mortgage. Still, there are significant differences in characteristics between the two, causing the distinction.
As mentioned, you use a HELOC as needed instead of receiving one lump sum.
Open credit allows you to have more control over how much you use and when you use it. Many HELOC options come with a linked card, like a credit card, to use your available funds when needed.
One of the most popular HELOC uses is for home repairs and other home improvement projects, simply because you can control how much goes into your projects.
You can use the money as you go and budget appropriately while working, using as much or as little as you decide. This is where the comparison of a credit card comes in.
A HELOC makes the most sense when you aren’t sure of the total amount that you need. Opening this line of credit with your equity gives you more control over how much you spend.
The HELOC option may be best if you are unsure how much you will need to borrow. It’s also suited if you want low initial rates that you can pay off quickly.
Most lending institutions offer HELOC options at various rates. Here at Promise Home Loans, you get to talk to a real human, and we get you the answers you need to make an informed decision.
Aside from talking to someone, we pride ourselves on being transparent and guiding you along the way in the entire process.
A HELOC may be hard to get if your credit score isn’t great or there are issues with your payment history. Suppose you know precisely how much money you need and are prepared for more extended repayment plans. In that case, a second mortgage may be suited for you.
It makes sense to get a lump sum from a second mortgage if you have a specific project or goal in mind. Circumstances in which a second mortgage could be helpful include debt consolidation or repayment of a higher-interest loan.
Some people have found success in using a second mortgage to pay for college tuition instead of utilizing student loans too.
To eliminate the worries of rising rates, look into getting a fixed rate when getting your second mortgage. This will save you from having higher payments in the future if rates rise.
Several financial institutions can help you achieve this goal, like the HELOC option. Different institutions offer different rates and terms, so take your time in order to make an informed decision. To discuss the options you have, apply here.
Taking out a HELOC or second mortgage is a significant financial commitment. Failure to weigh this decision adequately may affect your credit score, both positively and negatively. Still, both loan options have the potential for a financial rescue plan. Before you agree to a new loan, make sure you can afford the repayment terms, as this will increase your monthly budget.
When making your decision, some possible disadvantages that you can take into consideration include the following:
While these options have some negative consequences, there are still benefits from a HELOC or second mortgage.
There is no one-size-fits-all financial solution. There are dozens of variables and unique circumstances to explore. However, depending on your situation, both a second mortgage and a home equity line of credit might provide a path to financial stability.
A HELOC and a second mortgage are major financial decisions requiring an informed decision. Making the decision to utilize a HELOC or pursue a second mortgage requires careful consideration. Each option has benefits and drawbacks depending on the purpose of the loan.
Shop here at Promise Home loans and compare quotes to get the most attractive offer. Doing your due diligence will help ensure you utilize the best financial solution suited to your needs. If you have questions and are not sure where to start, give us a call at 888-762-7808.
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