Home Equity Loans: Fixed Seconds vs. HELOCs

[Jan 9, 2011.]

 

When it comes to home equity loans, you have choices. The two most common types of home equity loans are the fixed second and the HELOC. Which option you choose will depend, in large part, on why you want to access the money.

Fixed seconds -

One type of home equity loan is often referred to as the fixed second. It is called fixed, because it has a fixed interest rate, rather than an adjustable interest rate. It is called a second, because it is a mortgage lien in second position, also called a junior lien.

When you take out a fixed second mortgage against your home, you will get a lump sum check at the close of escrow. All of the equity made available through the home loan will be funded at once, up front. There are pros and cons to this type of home equity loan.

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Pro: You have a large sum of money which can be used for many purposes, including paying down other, higher interest rate debts, such as credit cards. The fixed interest rate, and fixed monthly, amortized payments, are easier to budget than home loans with an adjustable interest rate.

Con: You will likely pay more in interest with this home loan option. All of the money is funded up front, which means paying interest on the entire loan amount from day one. The interest rate for a fixed home loan is usually higher than an adjustable rate home loan. For example, whereas a fixed second might be 7.99% for fifteen years, an adjustable HELOC could start with a teaser rate as low as 2.99%.

HELOCs -

HELOC stands for home equity line of credit. A line of credit is different that a fixed second, because you don't get all the money at once, up front. Usually, the lender provides access to the funds, at will, using a check book, Visa card, or online transfers. There is no need to use the loan, and pay interest, until you accually need to use the money. The line can just stay open, untapped, until something comes up. When you do access the money, the monthly payments are likely to be very low. HELOCs often have interest only monthly payments.

Pro: This loan is likely to be very inexpensive. If you are thinking of making home improvements, a secured home loan, such as a HELOC, will likely be much less expensive than using a credit card for purchases. The low interest rate and interest only monthly payments make HELOCs about the cheapest form of financing available.

Con: These home loans can be as tough to pay off, in full, as a credit card. The interest only payments do not tackle the principal balance like a fixed second would. It is also a reusable credit line, meaning you can use it, pay it, and run up the balance again.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.