HELOC loans versus 2nd Mortgages: Pros & Cons of each. July 17
Home equity loans and 2nd mortgages normally have higher interest rates than first mortgages, but have little or no closing fees. They are convenient for borrowing money against the value of your property, and whether it is better to use a regular 2nd mortgage or a Home Equity Line of Credit (HELOC) depends on how you intend to use the loan. Here is a description of each to help you decide which to use:
2nd Mortgages:
A 2nd mortgage is the best choice for larger purchases when you want to spread out your repayment over a long period of time, with a predictable and easy to manage monthly installment plan. You can use a 2nd mortgage to do home improvements, buy a vacation home, or pay college tuition. If you take out a fixed rate 2nd mortgage your monthly payments will be essentially the same for the life of the loan, and you can take a decade or more to pay it back, which might make that big expense much easier to handle in your family budget.
Home Equity Lines of Credit:
A HELOC is a kind of second mortgage that behaves much like a credit card. You borrow what you want, when you want it, and if you only pay interest on the amount you borrow. You can pay off your balance and then start over with a fresh line of credit, in a way that is similar to the maximum credit allowance that corresponds to consumer credit cards. Typically there are no fees to open a HELOC, and if you choose not to use it then you don’t incur any interest charges. HELOC loans, like credit cards, are convenient for short-term financing of smaller purchases. But the interest you pay on your HELOC might very well be much less than you’re used to paying on credit cards, which makes the HELOC a good loan to use to consolidate your high interest cards into one low interest loan.
Keep in mind that both of these types of loans are secured by your property. Before you take out a 2nd mortgage or HELOC, make sure you can pay it back on time. If you default on the loan you could put not just your valuable credit rating but also your home in jeopardy, so plan ahead to protect that important asset.