The Pros And Cons Of A HELOC Compared To A Second Mortgage
If you are looking to take equity out of your home, you have two options. You can either get a home equity line of credit, or HELOC, or a second mortgage. Both options allow you to take the equity out of your home and spend it how you see fit. But there are key differences between the two that make them beneficial in different situations. Learning the pros and cons can help you determine which option may be better for you when you need money. Here are the pros and cons of a HELOC compared to a second mortgage.
The Cons of a HELOC Compared to a Second Mortgage
- Your Interest Rate May Fluctuate
When you take out a second mortgage, you know exactly how much your payment will be each month and what your interest rate will be. This is not always the case with a HELOC. With a HELOC, your interest rate may vary based on current market interest rates or the amount of your outstanding balance. Interest rates are not always fixed with a HELOC, which may make it difficult to determine exactly what your payment will be.
- You Have to Pay Back the Full Amount When the Line of Credit Expires
A HELOC works kind of like a credit card. If you have a $10,000 line of credit, you can charge the debt back up as soon as you pay some down. For example, if you have a $10,000 budget and you make a $2,000 payment, you now have $2,000 you can spend again. However, HELOCs have an expiration date to them. This is typically five to ten years, but may be shorter or longer depending on the lender. When your line of credit expires, you are required to pay the full amount back immediately. If you fail to do so, a lien may be placed on your home. As such, you need to be careful to know when the line of credit expires and have the debt paid off by then.
The Pros of a HELOC Compared to a Second Mortgage
- You Have the Flexibility to Borrow What You Need When You Need It
The biggest difference between a second mortgage and a HELOC is that with a second mortgage, you receive a lump sum of cash. With a HELOC, you receive a credit card or checks with a limit. This gives you the flexibility to borrow only the amount you need, when you need it. Many people who are remodeling their homes or paying for a child's wedding take out HELOCs. This is because the renovation project or wedding may go over the expected amount. If it does, you can pull out more money, up to your limit, as needed. With a second mortgage, you cannot pull out more than the lump sum that you are given.
- You May Pay Less in Interest With a HELOC
The other advantage to a HELOC is that you may pay less in interest. This is because it works like a credit card. If you pay the debt in full at the end of the month, no interest accrues. If you only have a minimal balance, your interest is minimal. If you do not need a fixed sum of money up front, a HELOC may help you keep the amount of interest you pay lower than if you were to take out a second mortgage.
Deciding whether to take out a HELOC or second mortgage is a big decision. If you are still unsure which is better for you, talk to your preferred lender. They will be happy to answer any questions you may have and help you select the product that best helps you get the money you need out of your home.
For more details on HELOCs and second mortgages, contact Rio Grande Credit Union.