Choosing between a second mortgage and a line of credit is a big decision more so now that most of an average person’s wealth is tied up to their home in the form of home equity.
There are several reasons for the above, such as people using up all their extra money to pay their mortgage so they can fully own their home sooner. It could also be the sudden boom of real estate in a certain area. Having your wealth tied up to your home as equity can make moving quite difficult. What can you do if your current home is no longer meeting your needs then? Well, you can still try to move (and have a very challenging time bidding on much more expensive homes) or you can renovate.
Making Your Home’s Equity Work for You
The good thing with renovating is that you can use your home equity to work for you. No need to dip into your savings if you can get approved for a home equity loan so you can pay for the construction bills. Sounds great, right? Yes, this could be great; but you have to know the differences between the various ways of tapping into your home’s equity to ensure that you won’t be biting off more than you can chew.
You see, home equity loans come in two types, the increasingly popular home equity line of credit (HELOC) and the more conventional second mortgage.
Why Get a Second Mortgage
A second mortgage will give you access to a lump sum of cash that you can use according to your needs. You won’t be able to get another loan until your second mortgage has been paid off over a fixed period of time but it gives you immediate freedom when it comes to accessing funds.
A second mortgage is more conservative and predictable than a HELOC. It allows you to plan expenses better as the specific amount you need to pay for a specified amount of time is stipulated. Although the interest rate is higher than that of a HELOC, a second mortgage is the better choice for those who want no surprises when it comes to future payments.
Because of the nature of the second mortgage, it offers less temptations in terms of spending. It is a great option for a single large expense such as buying a second property, setting up a business, or funding an extensive home renovation.
Why Get a Home Equity Loan Line of Credit
A home equity loan line of credit is better if you want more freedom with how much of your equity you can withdraw at a given time. It is more flexible than a second mortgage and allows you to reuse your loan for several projects and/or emergencies.
You have more flexibility in terms of payments for a HELOC as well. You can choose to just pay the interest for whatever amount you borrow at a certain month. The downside is that if you are a poor financial planner, you might end up dipping into your line of credit for expenses you don’t really need. You might end up having trouble paying because the HELOC’s interest rate will change with the market together with whatever amount you’ve used up.
A home equity line of credit is a great option if you have periodic semi-large expenses such as medical bills or tuition fee payments.
Ready to apply for a second mortgage or get a line of credit? Contact us and our mortgage brokers will help you get approval!
