Looking to remodel your home? Or perhaps pay for a child’s college tuition? The equity in your home is an asset that can be used for a variety of reasons. Typically home owners choose between a second mortgage or a home equity line of credit (HELOC) when they are looking to get cash from their home.
The Difference Between a HELOC and a Second Mortgage
While there are many similarities between a second mortgage and a home equity line of credit, they are still two different loans. They each have their own benefits, but in this economy there is a vanishing act with the home equity line of credit. Utah (HELOC) residents know that traditionally home values in Utah are above the national average, but it never hurts to have an understanding of the differences between these loan types.
What is a Home Equity Line of Credit?
A home equity line of credit means that the payments can be different every month because these loans work just like a credit card. Once homeowners decide how much equity they would like to use in their home, they would then use a debit card to access the funds or write a check against it. Creditworthiness determines how much can be used from the new home equity line of credit. Utah residents can opt to use the money for any expense they see fit, and once they pay it back they can use it again when they see the need to do so.
What is a Second Mortgage?
A second mortgage is a fixed interest loan, meaning that the payments will be the same every single month. The second mortgage has been a good option for those homeowners that want to stay away from using credit cards, and not have to live with high interest debt. Homeowners can decide how much they would like to borrow against their available equity outside of their primary mortgage. A second mortgage isn’t something the homeowner can draw from continually like a line of credit, but they would receive a lump sum disbursement after the three day rescission period that follows their loan closing.
Understanding the More Significant Differences
It is important to understand how these loans are priced which have determined how homeowners made their decisions in the past. A home equity line of credit is priced according to the prime rate, whereas the second mortgage rates are priced not only according to the market, but also according to the borrower’s credit score. Because the second mortgage is using up more equity in the home, they do have higher interest rates coupled with a shorter term.
One thing borrowers need to keep in mind is that using a home equity line of credit allows them to use the money only when they need it. When taking out a second mortgage, the borrower gets the money in one lump sum and puts that money into their bank account. At this point, the borrower may be paying more interest by the money sitting in the account, than they would if they had chosen the line of credit option where they could access it as they need it.
The mortgage experts at Fink and McGregor will lay out all of the options and we will decide together which options will fit your financial needs. No two borrowers are alike, and each loan at Fink and McGregor is as unique as the borrowers they encounter.
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