Deciding which type of loan is right for you largely depends on your needs and spending habits.
There is some confusion with regards to a second mortgage and home equity lines of credit. While both types of loans let you borrow against the equity in your home, they are not the same.
The Better Rate Mortgage team will help you understand the difference between the two and how to choose the type of loan right for you.
A second mortgage is a type of loan that uses your house as collateral. It’s a way to borrow money against the equity in your house, which is calculated as the difference between what you own in your primary mortgage and the value you could sell your house for if you were to put it up for sale.
The process for obtaining a second mortgage is similar to the one you went through for your primary mortgage. You will have to apply to a qualified lender and provide all the paperwork regarding your income and financial situation.
You can use second mortgages for various reasons, such as financing home improvements and repairs or consolidating other debts you may have.
Home Equity Loans
Second mortgages came in different sizes and shapes, and one of them is the home equity line of credit (HELOC.)
With this type of loan, you open a line credit on the value of your home. The bank will offer the loan at a fixed interest rate on the amount you actually borrow. The main advantage of a home equity loan is that you can borrow smaller sums. However, in most cases, you will need to retain about 20% equity in your home to qualify for a HELOC.
Here’s an example to help you understand this type of loan better. Let’s imagine that your home is valued at $300,000, and the mortgage balance is 60% of the home’s value ($180,000.) You need to retain 20% equity in your home, so that’s $60,000. That means that the equity available for borrowing is 20% or $60,000.
Second Mortgage vs. Home Equity Loans: What Should You Choose?
Deciding which type of loan is right for you largely depends on your needs and spending habits. If you need money intermittently, then a HELOC might suit you best as it offers you ongoing access to funds for ten years. But, if you have bigger expenses, like home repairs, then a second mortgage might be the best option.
Remember that you should never borrow money to pay off debt because, in reality, you are just moving the debt from one loan to another.
Do You Need Help Finding the Right Financing Solution for You?
If you are looking for someone to help make the home purchase or refinancing process a bit less overwhelming, then the experts at Better Rate Mortgage in St. Louis are here to assist you.