The housing market in Long Beach is strong and we’re still in what’s considered a seller’s market. In fact, July 2022, the median sales price for homes in Long Beach was $906,000. This was up 3.4% compared to July of 2021. So what does this mean for you as a homeowner? First off, if you’ve ever considered selling your home, now is a perfect time. Or, you can use some of the equity you’ve built up 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.
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.
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.