How To Decide Between a Traditional Second Mortgage and a Home Equity Line of Credit

[Dec 22, 2008.]

 

Whether you're purchasing your first home or refinancing your existing mortgage, choosing a second mortgage can be a difficult decision. The two basic choices will be a traditional second mortgage and a home equity line of credit. Each has their own benefits, but here are a few things to consider to help ease your decision.

Benefits of a Traditional Second Mortgage
A traditional second mortgage is a great option for homeowners in need of a large fixed sum; often used with the purchase of a home, paying off higher interest debt, or financing a onetime expense such as a medical emergency. Many first time homebuyers with low down payments often utilize a traditional second to avoid having to pay mortgage insurance. Existing homeowners will find that a traditional second makes more sense than refinancing altogether; since a low interest rate on the first mortgage will not be affected. One of the greatest benefits of a traditional second is the stability and predictability of such a mortgage. The interest rate is typically fixed for the life of the loan, and also cheaper than a home equity line of credit.

Benefits of a Home Equity Line of Credit (HELOC)
On the other hand, a home equity line of credit closely resembles many characteristics of a typical credit card account. Mortgage lenders extend HELOCs as a credit line, allowing homeowners to voluntarily tap into these funds. The mortgage payments are then based on a variable interest rate and the unpaid balance left on the account. HELOCs are great for homeowners who anticipate the need for cash, but may not need the financing in one large lump sum. HELOCs are great for ongoing expenses such as home improvements, yearly college tuition, business investments, or continuous medical expenses.  When compared to traditional mortgages, HELOCs are often much more flexible and versatile home loans.

Evaluating Your Options
Although HELOCs are quite flexible, keep in mind that these lines of credit carry the risk of adjustable rates, and the temptation to tap into the available funds. And although a traditional second mortgage may be more stable and conservative, a HELOC may be the better option if you don't need the funds all at once.

Before choosing either loan, it's first important to evaluate your needs. Think about how you are planning to use these funds, and what your short term and long term plans may be for your home. Also, before taking out an additional mortgage, be sure that you can actually afford the extra debt. With this troubled housing market, the last thing you want to do is trap yourself in your home with negative equity.

 

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.