Home Equity Line of Credit verses A Second Mortgage -- Which is Better?
There are two types of home equity loans -- the home equity line of credit and the second mortgage. A home equity line of credit gives you a credit line you can tap into whenever you wish while a second mortgage provides you with a fixed amount of money repayable over a fixed period. Below are basic differences between a second mortgage and a home equity line of credit:
(1) A second mortgage is less flexible than a home equity line of credit.
With a line of credit, the borrower can tap into the fund whenever he needs. This is not true with a traditional second mortgage. Here, the money is borrowed, usually at a fixed rate for a period of 5 to 15 years, and paid back in monthly payments. If the borrower wanted to borrow additional funds, he would have to enter into a new mortgage loan complete with fees and closing costs.
(2) A second mortgage is more certain and conservative than a line of credit
If you are naturally conservative and like the idea of knowing you have borrowed X amount of money and will pay it back in X amount each month for X number of years, then a second mortgage is for you.
(3) Second mortgages usually have higher interest rates than lines of credit
One of the biggest negatives with second mortgages when compared to lines of credit is that second mortgages usually come with an interest rate two or more points higher than a home equity line of credit. However, because the repayment term is fixed and not drawn out as with many home equity lines of credit, you would probably wind up paying less in interest charges.
(4) Second mortgages offer less temptation to spend than a line of credit
Second mortgages do not allow you to tap into a seemingly endless pool of credit whenever the mood strikes you; therefore, the tendency to overspend and stretch out the repayment is somewhat limited. With a home equity line of credit, borrowers can use the money whenever they want for things they don't really need and will regret buying later.
Should you chose a second mortgage or home equity line of credit?
If you plan to use the money for debt consolidation, opening a new business, a dream vacation or home improvement, a second mortgage is recommended by financial experts (not that a financial expert would actually advise you to borrow against your home to go on vacation). Be sure you borrow enough at inception, since, as mentioned above, applying for additional funds could be costly and a pain in the neck.
If you plan to use the money for recurring debt, such as medical bills, tuition payments or a rather large home improvement project, a home equity line of credit is usually the best choice. This is because a home equity line of credit allows you to tap into a credit line only when you need.