With rising first mortgage rates, smart homeowners are looking at second mortgage options if they need cash, because they don’t want to refinance their entire mortgage because the interest rate they have is low and fixed for 30 years. Many consumers are looking to access equity in their home must make a choice between a fixed rate 2nd mortgage and a home equity line of credit. This can be a tough decision, as each type of home equity loan has distinct benefits, and both are tax-deductible, but if you understand the basic differences in their structure, you can make an intelligent decision for you, your family and your financial future.According to a recent Bankrate article, a home equity line of credit is “an agreement to lend a specific amount to a borrower and to allow that amount to be borrowed again once it has been repaid.” With a HELOC, you can borrow money against your equity up to a certain pre-determined amount. There is no set repayment schedule and in many cases, you are only responsible for paying the interest on what you borrow for the first several years. A home equity line has an adjustable interest rate, which is typically tied to the prime rate index, as reported by the Wall Street Journal. 2nd mortgage lines of credit are best suited for homeowners who want the flexibility to borrow various amounts of cash at staggered intervals. Because they HELOC’s have revolving interest much like credit cards, home equity lines of credit are not the most practical choice for homeowners who would be tempted to spend carelessly.Second mortgages are lump sum loans with fixed interest rates and fixed payment terms. With each monthly payment, you are paying down both the principal and the interest. A home equity loan makes the most sense for those who need access to cash in a lump sum and are using the money for long-term purposes, such as a home construction or bill consolidation. They are also a smart choice for homeowners looking to get away from adjustable interest rates.Whichever type of loan you chose, you need to keep in mind that your home is the collateral. It is always a wise choice to evaluate if what you are borrowing for is worth liquidating your valuable asset called, home equity.
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