Second Mortgage and HELOC- What’s your pick

According to the Arizona Republic, Arizona has the second highest rate of homes where the owners owe more than the home is worth. Nearly 50% of Arizona's homes are not worth what is owed, whereas in Phoenix the number is 55%. This mostly happens due to consumer's lack of knowledge about the mortgage industry. Most people remain under the preconceived notion that second mortgage and home equity loan are the same and therefore confuse one for the other. Although it is true that both home equity loan and second mortgage loan are associated with each other but they have distinct individual characteristics, so it’s not very difficult to distinguish them from each other. If you are looking forward to mortgage refinance and can’t decide between second mortgage and HELOC, read on to clear your mist.

Second Mortgage

A second mortgage is a sort of home equity loan. The amount you can borrow on a second mortgage generally depends on the difference between the current value of your home and the remaining principal balance on your first mortgage. In fact the second mortgage is quite an effective means of tapping the asset value of your home. It not only helps you to meet your financial needs but also spares you from acquiring high interest unsecured debts like credit cards.

If the total loan-to-value ratio of your first and second loans is equivalent to 85 percent of appraised value of your home, you can attain a second mortgage. However, maximum lenders in almost all states allow you to obtain a second mortgage that equals to 125 percent of the appraised value of your home. Second mortgages are nothing but 15- to 30-year loans with a fixed interest rate. While issuing a second mortgage loan the borrowers take into account the credit history, home price, and the current interest rate of the potential consumer. Though the second mortgage has a higher interest rate, but the fees are typically lower.

People, who have an urgent financial need, usually opt for a second mortgage. Second mortgages offer a lump sum to pay out a fixed sum of money within the stipulated period of time. You can use the amount to home related expenses like roof repairs and home renovations and at the time can use the money for expenses not related to house expenditures, like school tuition, car repair, vacations, debt consolidation and other financial needs.

Home equity loan

Home equity loan is quite different from a second mortgage loan. It refers to a home equity line of credit (HELOC). A HELOC is usually revolving and is quite similar to a credit card, wherein the interest and the loan amount depend on the consumer’s creditworthiness. Just like the second mortgage, a HELOC can also be used for any type of expense, but it has an added advantage. Anything that is paid back above the interest owed generally returns to the account and can be used again when needed. Remember, a home equity line of credit loan is available with a term of up to 15 years. If you sell your home before you pay back the line of credit completely, it does not mean you can escape from the rest of the balance. You have to pay it upon completing the sale. However, this is applicable to both the HELOC and the second mortgage. To determine the limit of your HELOC, lenders generally assess your homes appraised value. They start calculations at 75 percent of that value and then deduct the remaining balance owed on your mortgage.

Final thought

Make sure you choose the loan which suits your finances the most. If you are looking for a resort to meet one-time expenses, you can opt for a fixed-rate second mortgage whereas if you have a frequent need for a little extra amount, a HELOC would be right for you.