Second Mortgage or a HELOC? Which Is Better?

Choosing between a HELOC and a second mortgage can be confusing because both are loans that are attached to your home. Technically speaking, a HELOC and a second mortgage are both second mortgages, because you can only apply for them on top of your primary mortgage…so which is better and how are they different?

HELOC vs Second Mortgage

A HELOC and a second mortgage differs in how they are given by the bank and how they can be repaid. As mentioned earlier, both types of home loans are secured by your home, so it is very important to know how they work and to assess your capacity to pay them to ensure that you don’t end up losing your home.

How Does a HELOC Work?

A HELOC, or home equity line of credit, is a revolving line of credit that can be reused until the set limit is reached for the amount or the time period. Payment for the loan is on top of the primary mortgage and you only have to pay the amount that you use up or took out of the maximum allowable amount.

Because this is a revolving loan, you can re-borrow your paid-for credit until the terms of the HELOC state you can’t anymore. This means that if your HELOC is good for 5 years, you can keep re-borrowing any amount you’ve already paid towards it without the hassle of reapplying for a new loan.

How Does a Second Mortgage Work?

Although a second mortgage is also attached to your home like a HELOC is, the loan is given as a one-time lump sum that you’ll have to pay according to set terms. You won’t be allowed to apply for a new second mortgage until you’ve fully paid your second mortgage.

Because a second mortgage is given as a lump sum, most people who apply for it use it for debt consolidation and/or house deposits. You really have to think a lot and assess your full financial situation before applying for a second mortgage because inability to pay based on agreed terms can make you lose your home.

Is it Smart to Use These Loans as Emergency Funds?

The real answer to this is no. Why? Because with both loans, you’ll end up paying interest and putting your home at risk. Using them as backup cash for something that didn’t happen yet isn’t a good strategy. However, if you’re in a bind now and it can be a few months or more before you can recover, then applying for a HELOC or a second mortgage is a viable option.

Which Is Better?

The best answer for this will depend on your specific circumstances. Just remember that their nature and payment schemes are way different so having a clear idea of your future financial situation is paramount to intelligently choose between a HELOC and second mortgage.

Choosing between financing options can be confusing. This is why you need assistance from mortgage professionals who have a long track record of helping people get approved for loans while making sure that payment terms are doable for you. Contact us today to apply for a second mortgage or apply for a home equity line of credit.