Second Mortgage vs Home Equity Line of Credit

Real Estate FAQs - Second Mortgage vs HELOC - YouTube

To put it simply, the housing market in Long Beach is strong. In fact, in February 2021, the median sales price for homes in Long Beach was $787,000. This was up 19.2% compared to February of 2020. So what does this mean for you as a homeowner? First, if you’ve ever considered selling your home, now is a perfect time. Or, take equity out of your house to buy a second home, remodel, or make home improvements. That sounds easy, but how do you take out equity? You have two options and they both have pros and cons. Here’s our guide to second mortgages vs a home equity line of credit.

Real Estate FAQs - Second Mortgage vs HELOC - YouTube (1)

Second Mortgage

The first option is a second mortgage which is a loan secured against your house. This type of loan is appropriate for times when you need a lump sum of money. Remember that if you default on this loan you are at risk of losing your house.

Pros and Cons of a Second Mortgage:

  • Pro & Con: A second mortgage loan tends to have higher interest rates than a first mortgage. However, lower interest rates than most credit cards.
  • Con: It’s important to factor in higher fees and the length of time needed to pay back the second mortgage.
  • Con: Once the loan is paid off, you have to open a new loan to borrow additional money.
  • Pro: A second mortgage is easy to qualify for because you are borrowing against your home. You can borrow up to 85% of the house’s value.
  • Con: If you default on the loan the bank can sell your house to recover any unpaid funds.
  • Pro: Interest rates on a second mortgage are tax-deductible.

Real Estate FAQs - Second Mortgage vs HELOC - YouTube (1)

Home Equity Line of Credit (HELOC)

The second option is a home equity line of credit. This loan is also secured against your house. The main difference between this loan and a second mortgage is how the loans are paid out and handled by the bank. Unlike a second mortgage, a home equity line of credit is not a lump sum of money. Instead, the bank opens a line of credit and allows you to take out monthly payments. The equity in your home guarantees the loan and the payments are determined by how much you currently owe on your loan.

Pros and Cons of a HELOC:

  • Pro: A revolving line of credit means you can borrow up to a certain amount and make monthly payments.
  • Pro: Once you pay back the amount borrowed then you can turn around and borrow it again. It is similar to a credit card. However, interest rates tend to be much lower than the APR on credit cards.
  • Pro: A home equity line of credit is easy to qualify for – even if you have bad credit. This is because your house secures the loan.
  • Pro: Interest rates on the line of credit are tax-deductible.
  • Con: Banks can close the line of credit if it is inactive for a long period of time.

Pro Tips for Second Mortgages and HELOCs

Remember, your house is at risk when taking out a second mortgage or a HELOC. Since these loans can provide large sums of money, it can be tempting to use your house as an ATM Machine. Therefore, it’s important to consider the reasons for taking money out of your house. Is this money you really need? Or money that will make go back into making your house worth more? Don’t forget that these are loans, not free money. While second mortgages and home equity lines of credit have a time and place, do your financial homework before taking one out. Make a detailed list of your income and expenses including the payments of this new loan ahead of time. Also, be sure to have 3-6 months of income in savings for emergencies, because these large loans have large payments.

Finally, borrow the money from a reputable company and always ask for all the details in writing. You should not feel pressured to borrow the money, and a reputable lender won’t make you feel this way. If you need a referral to a good lender, please let us know.

About the Author

Shannon Jones has been selling real estate since 1998 and specializes in listing and marketing homes. She has consistently been one of the top Realtors in the Long Beach area. Prior to her award-winning career in real estate with the Shannon jones Team, Shannon has had successful careers in journalism and public relations. She holds a bachelors degree from UC Irvine and a masters degree from UC Berkeley. Shannon holds E-Pro, CDPE (Certified Distressed Property Expert), and PSC (Pre-Foreclosure Specialist) certifications. Shannon is very personable and maintains a very strong moral compass, always putting the best interest of home buyers/sellers above monetary goals. A California native, Shannon enjoys gardening, travel, reading, cooking and poker when she’s not selling homes MY DESIGNATIONS Lic# 01247705 | CDPE (Certified Distressed Property Expert) | E-Pro | PSC (Pre-Foreclosure Specialist) MY SERVICE AREAS Anaheim Bellflower Buena Park Carson Cerritos Cypress Downey Fountain Valley Garden Grove Huntington Beach La Palma Lakewood Long Beach Los Alamitos Los Angeles County Norwalk Orange County Rossmoor San Pedro Seal Beach Signal Hill South Bay Westminster

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.