2nd Mortgage Loan – HELOC Vs Term Loan


Why Get a 2nd Mortgage LoanIf you’re currently in the market for a 2nd mortgage, chances are you’re looking for the solution to one of three basic problems:1) The monthly payment on your current 2nd mortgage has become unaffordable due to escalating interest rates on your Home Equity Line of Credit or “HELOC”. This is because most HELOCs have floating interest rates.2) You need cash–for any number of reasons–and you’ve maxed out your existing Home Equity loan. As long as you still have additional equity in your home, you would be able to access that equity through a new second mortgage.3) The amount you’re spending each month paying down credit cards or other debt leaves you with very little money left over and you need to consolidate your debtMortgage Basics Before addressing each of these scenarios separately, let’s go over some mortgage basics. A 2nd mortgage loan generally comes in one of two flavors. 2nd Mortgage Term Loans and Home Equity Lines of Credit.Second Mortgage Loan The second mortgage loan is very similar to a first mortgage; the bank loans you a lump sum of money all at once and you have a specified length of time-typically 15 or 30 years-to repay the balance. You can use a 2nd mortgage to purchase a home in conjunction with a simultaneous first mortgage, avoid Private Mortgage Insurance through this 2nd loan, or add the 2nd mortgage loan to the first mortgage to consolidate debt or free up cash. Although interest rates are usually higher on 2nd mortgage term loans than they are on first mortgages, they are often fixed and the payments remain predictable, if not constant. This is how term loans differ greatly from Home Equity Lines Of Credit.Home Equity Line of Credit The Home Equity Line Of Credit or “HELOC” has become the most popular type of second mortgage loan over the past decade-especially given the recent economy! You can think of the HELOC as being a combination of the traditional second mortgage and a credit card. A HELOC is like a second mortgage because you’re actually putting your house up for collateral – a fact many consumers overlook. So if you default on your HELOC payments, you could be in danger of losing your home.A HELOC is similar to a credit card, however, because you have a set credit limit -determined mainly by the value of your home and the equity you have left. Your payments can vary widely because the monthly payments go up or down depending on your outstanding balance (just like a credit card). HELOC rates are usually better than most credit card rates, so consolidating several high-interest rate credit cards into one lower monthly payment has proven beneficial for millions of homeowners-as long as the payment is still affordable and you have equity left in your home.