2nd MORTGAGE vs HELOC
Understanding your mortgage options can be a daunting task. Add to that, the variables at play which can affect your interest rate, loan terms, or even eligibility for financing. Here at Optionwide, we take the time to advise and educate, so you can make the most informed decision whether you choose to do business with us or not.
As your home appreciates, you may want to leverage equity to pay down debt, make improvements, send a child to college, or even start a new business. If you’re happy with the interest rate on your first mortgage, a cash-out refinance will be out of the question. Don’t worry! You still have viable options that will allow you to keep your low-rate first and take out a second mortgage or a Home Equity Line of Credit (HELOC). There are pros and cons to both loan options.
At Optionwide Financial, we offer a Closed-End Second Mortgage product. This loan provides the cash you need in an upfront, lump sum payment, with a stable fixed rate that is amortized over 30 years. Another type of loan product that is very popular in the market with direct access to home equity is a HELOC. Learn more about the pros and cons of each loan option below.
WHAT ARE THE DIFFERENCES BETWEEN
A 2ND MORTGAGE & HELOC
To learn the key differences between 2nd mortgages and HELOCs -
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- Closed-End Second Mortgage: Also known as a home equity loan or a second mortgage, this is a one-time lump-sum loan. Once you receive the funds, you start making stable, fixed monthly payments until the loan is fully paid off.
- HELOC: A HELOC is a revolving line of credit, like a credit card with a variable interest rate. You are approved for a certain credit limit, and you can borrow and repay funds within that limit during a specified draw period (usually around 10 years). As you repay the borrowed amount, the credit becomes available again, much like a credit card.
- Closed-End Second Mortgage: These loans often come with a stable fixed interest rate, providing predictability in your monthly payments.
- HELOC: Interest rates for HELOCs are typically variable and tied to a potentially volatile benchmark rate (such as the prime rate) plus a margin. This means your interest rate can fluctuate over the life of the loan.
- Closed-End Second Mortgage: You receive the entire loan amount upfront, providing full access to your funds immediately.
- HELOC: You can access funds as needed during the draw period, which can be convenient for ongoing or varying expenses, although you will typically not have access to the funds for the first 60-90 days
- Closed-End Second Mortgage: Repayment begins immediately, and you make fixed monthly payments that include both principal and interest.
- HELOC: During the draw period, you're typically only required to make interest only payments. After the draw period ends, you usually enter a repayment period (around 10-20 years) where you must start repaying both principal and interest.
- Closed-End Second Mortgage: You receive a fixed lump sum and make regular payments from the start.
- HELOC: Flexible in terms of borrowing and repaying, as needed, during the draw period.
- Closed-End Second Mortgage: Often used for large, one-time expenses like major home renovations or consolidating high-interest debt.
- HELOC: Commonly used for ongoing expenses, home improvements, or unexpected costs due to its flexible borrowing structure.
- Closed-End Second Mortgage: Offers more stability with fixed interest rates and fixed monthly payments which makes budgeting easier.
- HELOC: May carry more risk due to interest rate fluctuations during the draw and repayment periods due to the variable nature of the benchmark rate.
Contact an Optionwide mortgage banker today for a free, no obligation consultation.