As a homeowner, you have the ability to use the equity in your home as a financial tool. Whether it be starting a business, home improvements, or debt consolidation, home equity can be used to help achieve life goals. Two ways to use that equity are a traditional second mortgage and a home equity line of credit. If you’re new to these terms, you are likely wondering what is the difference between a traditional second mortgage and a home equity line of credit?
Commonalities Between a Second Mortgage and Home Equity Line of Credit
Applying for a second mortgage and a home equity line of credit are very similar to the process for a primary mortgage. Pay statements and tax returns may be required, as well as a credit check. In both cases the interest rate will be higher than a primary mortgage, but lower than an unsecured loan. The interest for both are tax deductible.
Traditional Second Mortgage
There are different loan products available with varying terms such as 5 and 10 years. It is an installment loan with a fixed monthly payment. If approved for a traditional second mortgage, the funds are paid in one lump sum which can be used for whatever you want including debt consolidation, college tuition, or major home improvements.
Home Equity Line Of Credit
Even though a home equity line of credit is secured by your home, it works very much like a credit card. The interest rate is usually variable, based on the prime interest rate. A home equity line of credit allows the borrower to extract funds as needed over an indefinite period of time. The monthly payment is usually some percentage of the balance, with some minimum amount also specified.
Uses for Home Equity Loans
A traditional second mortgage is typically used by people who need a single lump sum for a single instance in time. Whereas a home equity line of credit is a good option for an ongoing need for funds to be available for years in the future.
Whether the best choice for your financial needs is a traditional second mortgage or a home equity line of credit, both are financial tools that can help you achieve some life goal. However, like all financial tools, if used incorrectly can get a homeowner into a financial crisis. Before using either a second mortgage or home equity line of credit, you may consider speaking to a financial adviser as to whether using either product is in your best interest.
How about you, EOD Nation, have you used either a traditional second mortgage, or a home equity line of credit?