Understanding the difference: Home equity line of credit vs, Second Mortgage

NORFOLK, VA, Jul 10, 2013—At some point in life—maybe your oldest is off for college or you're finally ready to put on that home addition—you may want to tap into the equity of your home. You have several options here, and two that are commonly confused are the home equity line of credit, and the second mortgage. Below, Louis Eisenberg, Associate Broker REALTOR ABR SFR of Prudential Towne Realty gives us a breakdown of the difference.

“A second mortgage is any loan that involves a second lien on the property,” says Eisenberg. “You receive a lump sum at the beginning of the loan, and every month you pay down the principal and the interest.” The second mortgage can be fixed or variable, and the available amount is often based on the difference between your home's current value and the outstanding principal balance on your first mortgage.

“As second mortgages are subordinate to first mortgages--meaning your first mortgage gets paid off first should the loan default—they are riskier for lenders and often come with higher interest rates,” says Eisenberg.

A home equity line of credit (HELOC), like a second mortgage, lets you tap up to about 80 percent of the appraised value of your home, minus your current mortgage balance. The way the money is distributed, however, is much different than a second mortgage.

“Similar to a credit card, you are given a limit and are able to borrow up to that limit for a certain period of time, which can be anywhere from 5 to 20 years,” says Eisenberg. However, because it is set up as a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.

Unlike a second mortgage which can be fixed or variable, a home equity line of credit is always adjustable.  “It's of the utmost importance that you understand the terms of the loan,” says Eisenberg. “If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.”

So which option is better for you? A HELOC is best if your monetary needs will be spread out over a length of time, like if you're renovating your home or paying for a college tuition.  A second mortgage is probably best if you need all of the funds at once, as it's a fixed-rate.
For more information on taking out another loan, please contact Louis Eisenberg, Prudential Towne Realty, leisenberg@prudentialtownerealty.com, (757) 572-7244, or www.LouisEisenberg.com