The terms home equity line of credit and second mortgage are mistakenly used interchangeably by most consumers. Even though both options offer you an opportunity to borrow against the equity in your home, their payouts differ significantly.
The first major difference is that a HELOC comes with an approved limit, and you can withdraw several times, whereas a second mortgage is paid as a lump sum.
When you qualify for a home equity line of credit, you will be allowed to borrow small or large amounts to fund your projects (so long as you do not exceed this approved limit). It works similar to a credit card. You can withdraw small amounts or larger ones that are still within your limit.
On the other hand, a second mortgage, which is also referred to as a home equity loan, doesn’t offer you a pool of funds that you can access and withdraw several times. With a second mortgage, you get a lump sum payment upfront once it is approved.
Secondly, there’s a major difference between how interests are charged in a HELOC and a second mortgage. With a HELOC, you repay what you’ve borrowed within a month, so the interest is never fixed, but it is calculated against how much you’ve borrowed. The payments must be made on time, and you can continue borrowing so long as you haven’t exceeded your credit limit.
On the other hand, a home equity loan often comes with a fixed interest charged together with the lump sum and you are expected to pay a fixed instalment during the term of the loan. It works much like any other type of loan since you cannot borrow again using your home’s equity until it’s fully paid.
Second mortgages can help consumers access funds to invest in some projects, but they also come with certain limitations.
Second mortgages allow you to borrow amounts that are much higher than what you may be able to qualify for if taking a personal loan. In many cases, homeowners can borrow up to 80% of the value of their home.
Second mortgages typically attract lower interest rates compared to personal loans and other types of financing. They are considered one of the most affordable types of financing.
You risk losing your home: One of the biggest limitations of taking a second mortgage is that it puts you at risk of foreclosure if you fail to make payments and default on the loan. To avoid this, we encourage homeowners to only take a second mortgage if they can afford to make the extra payments comfortably.
Additional costs: Another drawback of a second mortgage is that they attract additional costs that you will need to cover in your monthly payments. For instance, an appraisal of the property must be conducted at the homeowner’s account. Other fees, such as credit checks and origination fees, can also make this form of financing expensive for homeowners.
Most homeowners will take a second mortgage to:
We recommend using the funds you obtain from a second mortgage wisely. If not used properly HELOCs and second mortgages can sink the consumer into further debt. A second mortgage shouldn’t be seen as an easy way of spending more money. It is smarter to put that money into worthwhile projects that can even help you build more wealth opportunities in the future. When looking for projects to invest in, consider the risks.
Before applying for a second mortgage, you need to find a valid reason to take out this debt and check to ensure you’ve gathered enough equity in your home to qualify for this loan. The next step, which is quite important, is identifying the right lender who can offer you a suitable product. We have certified mortgage brokers who will take the time to understand your unique circumstances and get you the best solution. If you need help to secure the best second mortgage, our experts can help.
...pick the one thats right for you.
|Current Mortgage||Second Mortgage|
|Current Home Value $400,000||Current Home Value $400,000|
|$200,000 Existing 1st Mortgage = $1,165/month||$200,000 Existing 1st Mortgage = $1,165/month|
|Before Taking Advantage of Home Equity||$50,000 2nd Mortgage = $250/month|
|$20,000 Auto Loan @ 10.0% = $430/month||Auto Loan = Paid|
|$20,000 Credit Card @ 18% = $600/month||Credit Card Debt = Paid|
|$10,000 Store Card @ 28% = $300/month||Store Card Debt = Paid|
|Total $2,495/month||Total $1,415/month|
You Save $1,080/month!!!
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