Basics of Second Mortgages and HELOCs
A second mortgage is very similar to a Home Equity Line of Credit or HELOC. They can both provide funds for home improvements, second home purchase or any other financial needs. But there are some differences between second mortgages and HELOCs and it is important that you know which one to go for so that you get the benefits you are looking for.
A second mortgage is simply a second loan on your home on which there is already an existing primary loan. The second loan will get paid only after the first is completely settled in case of a default. A second mortgage will come at a higher interest rate than the first. This is because the lender’s risk is higher in a second mortgage.
A second mortgage loan is a fixed amount, usually repayable over a specified time in equal installments. This kind of loan is suitable if you know how much funds you are going to need for the expenses you have in mind.
A HELOC, on the other hand is a revolving credit product, which uses your home as collateral. It is a smart idea to save a HELOC for critical expenses like education or health care because it places a lien on your most valuable asset – your home. Generally, your HELOC amount will be calculated based on your home’s appraised value less any existing mortgage balance against it. Unlike second mortgages, HELOC funds can be withdrawn as and when required during a pre-determined period.
