What’s the Difference Between a HELOC and a Second Mortgage?

June 1, 2022

A home equity line of credit (HELOC) is a type of credit that is determined by how much your property is worth, how much equity you have in that property and what your credit score is.

A second mortgage is also known as a home equity loan. With a HELOC, you will be allowed to withdraw money on a need-to basis. With a second mortgage, you will be provided with a single lump-sum payment.

You will then be required to make monthly payments on the lump sum or the amount you withdrew until your balance is fully paid off. With both of these lending options you are leveraging the value you have accrued in your home for cash.

Here, we will delve into the key differences between a HELOC and a second mortgage.

How does a HELOC work?

A HELOC can be compared to a conventional credit card in some ways. Funds can be borrowed up to a predetermined credit limit, and then you can repay the amount borrowed with interest.

A HELOC is a revolving form of credit, and may provide greater flexibility than a second mortgage. For example, you may be able to withdraw money on a weekly or daily basis. You can also make payments on a weekly or daily basis if desired.

The interest rates charged on a HELOC may also be lower than some of the other loan products on the market.

How to Qualify for a HELOC

In order to qualify for a HELOC, you will need to own a home. The equity that you have built in your home over the years will also need to add up to at least 20% of its total value. As well, you must prove that you have a stable job that pays a sufficient amount to qualify.

A good credit score is also a must if you want to qualify for a HELOC.

Advantages of a HELOC

HELOCs tend to carry lower interest rates than most loan options because they are secured by your home equity. HELOCs provide the recipient with easy access to credit that they can tap into whenever needed. Interest-only payments are another advantage, as the principal balance doesn’t need to be paid until the end of the HELOCs term. Additional payments can be easily made on a HELOC without any fees or penalties.

You can borrow as needed to fund home renovations, vacations, and business ventures, for example.

How does a second mortgage work?

You need to first determine how much equity you have accumulated in your home before you start considering whether a second mortgage is right for you and your family. A second mortgage may carry a one to 20-year term.

Just like a first mortgage, you will need to repay a certain amount each month until the mortgage is paid off.

It may also be possible in some cases to take out a new second mortgage or extend the loan if you are having issues making payments. Please speak to your lender in order to determine the terms and conditions that they offer.

How to Qualify for a Second Mortgage

One of the prerequisites for getting a second mortgage is to have a sufficient amount of equity in your property, usually at least 15%. A debt-to-income ratio of at least 43% is often mandatory. Moreover, a credit score of at least 620 will usually be required.

There may be some ways to get around the aforementioned qualifiers, but you will need to shop around in order to explore your other options.

Advantages of a Second Mortgage

The interest rates that are charged on a second mortgage tend to be lower than other types of debt that are available to most homeowners.

Just like a HELOC, you can use the money for anything you want. If you have large expenses that you cannot afford to pay on your own, such as medical or funeral expenses, home renovations, or an automobile purchase, then a second mortgage can help fund those expenses.

Some people may even take on a second mortgage in order to purchase an investment property or to buy a vacation home for their families.

Closing Thoughts

Both second mortgages and HELOCs make use of the equity that you have accumulated in your home in order to use it as a form of collateral in the event that you default on the loan.

The key differences between second mortgages and HELOCs is how they are issued and how they function. While second mortgages and HELOCs are not for everyone, they may help you get out of a precarious predicament, or help fund some of your projects when they are used prudently and smartly.

If you are considering a second mortgage or a HELOC, then you should speak to your bank or another financial institution to learn more about their benefits and drawbacks so that you can make an informed decision.

Source:

HELOC or Second Mortgage: Which is Better and What's the Difference? (umb.com)

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Thomas P
I believe in making the impossible possible because there’s no fun in giving up. Travel, design, fashion and current trends in the field of industrial construction are topics that I enjoy writing about.

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