A home equity line of credit is not the same as a second mortgage although the other term for a second mortgage sounds like it. A second mortgage also goes by home equity loan and some people are confused about the difference between the two. Both are types of mortgage loans that go on top of a primary mortgage but they differ in how the funds are made accessible to the homeowner. With a home equity loan, the money is handed out as a lump sum while with a HELOC, the money is made available as a revolving credit line, very much like a credit card.
How Does a Home Equity Line of Credit Work?
A HELOC works as a revolving line of credit. This line of credit is opened by the lender using the home equity as a guarantee against the credit line. This means that a borrower can keep borrowing and paying the line of credit for as long as and as much as the term allows during the draw period which typically lasts for about 10 years.
The payments and interest for a HELOC vary per month based on the amount borrowed. The repayment period typically lasts for about 20 years. If no amount was used up during the loan period, then there is nothing to pay back because the homeowner technically doesn’t owe anything from a HELOC until they draw from the line of credit. Note that if the home’s value drops significantly, the line of credit may be frozen by the lender and missing payments can mean risking losing one’s home.
How Does a Second Mortgage Work?
A second mortgage uses the home’s equity as collateral. The homeowner is allowed to borrow money based on the equity that they have. This money is given out as a lump sum at the beginning of the loan. The loan then follows a fixed payment amount and interest until the entire loan is paid off. Once paid off, the homeowner can borrow again.
Missing payments on a second mortgage can place your home at risk of foreclosure. It is best to make sure that you can afford to pay both the primary mortgage and second mortgage before getting one.
Is A Second Mortgage Better Than A HELOC?
People use a HELOC or a second mortgage to meet their specific needs because each comes with their set of pros and cons. Both can be used for big and small expenses such as paying for home renovation, financing debt consolidation, funding higher education, and more. Both can result in losing one’s home for failure to make payments.
Can A Second Mortgage or a HELOC Be Used as An Emergency Fund?
Technically, the answer is yes but ideally, no. It can take a few days to a few weeks for the loans to be approved and so they can’t be relied upon in an emergency unless the loans are already existing. It is best to have some savings for an emergency for optimum financial stability.
Get A Second Mortgage or a HELOC Now
If you’re thinking of applying for a HELOC or getting a second mortgage, it is best to consult with trusted mortgage professionals first to find out which one may be better based on your specific circumstances. Contact us at Mortgage Central Canada so that our team can address your concerns. We are available to serve you in these trying times.