Second Mortgage vs. Home Equity Line of Credit: Which is the Best Choice?

If you are a homeowner in need of an equity loan, but do not wish to refinance your existing mortgage, you have the choice of an equity line of credit or a second mortgage loan. Each option has advantages and disadvantages over the other. Here are several suggestions to help you decide which home equity loan type is right for you.Home equity loans come in two flavors: second mortgage loans and home equity lines of credit. Depending on your reasons for borrowing and the amount you need for the loan, choosing the right home equity loan for your situation could save you thousands of dollars. Here are the pros and cons of both loan types.Equity Lines of CreditChoosing a Home Equity Line of Credit, or HELOC, gives you the greatest amount of flexibility. If you are using equity for renovations to your home, an equity line of credit offers the flexibility to make sure the job gets done. Home improvements and renovations rarely come in under budget; if you only planned for a fixed amount on your project, you could find yourself short when unforeseen circumstances arise. Equity lines of credit offer a debit card you can use for purchases just like a credit card that is tied to the equity in your home.There are disadvantages to Home Equity Lines of Credit. These loans typically come with variable interest rates that are higher than comparable second mortgage loans. Because the loans come with variable rates the lender will adjust the interest rate and payment amount at regular intervals. This means your monthly payment will almost always go up when the lender resets the loan. Another disadvantage of this type of loan is the ease of access provided by the debit card. This ease of access could tempt you to spend more money than you had intended.Second Mortgage LoansSecond mortgage loans have many advantages over equity lines of credit. These loans come with fixed interest rates and allow you to borrow a specific amount without the temptation to overspend. Second mortgage loans are ideal for homeowners that want to consolidate their bills into one low payment. When you take out a second mortgage for this reason, it is important to remember that debt consolidation does not eliminate your debts; it simply moves it around to make it easier for you to repay. You gain a tax advantage with home equity loans, the interest you pay on these loans can be deducted on your Federal Income tax.There are risks associated with both varieties of home equity loans. Because home equity loans are secured by your property, if you fall behind on the payments your lenders could foreclose and take your home. The interest rate you qualify for on your home equity loan will be higher than the rate of your primary mortgage because this lender assumes more risk for the loan.
You can learn more about your second mortgage and home equity loan options by registering for a free mortgage guidebook.