Home equity loans and home equity lines of credit are hot mortgage news topics recently because of changes with mortgage rules and interest rates. There is also quite a lot of misunderstanding from readers thinking that HELOCs and home equity loans are one and the same. In this write-up, we’ll be delving more into HELOCs and differentiate them from second mortgages.
A HELOC or A Second Mortgage is a Line of Credit That is Secured by the Value of Your Home Equity
Second mortgages and HELOCs are both loans that use the equity of your home as collateral; however, while a second mortgage is dispensed as a lump sum, a HELOC is given as a loan limit from which the borrower can use as little or as much of for a predetermined period of time. Because of this, the required monthly payment for HELOCs may differ from month to month unlike with second mortgage with which the required payments are oftentimes fixed rate.
You Can Lose Your Property if You Miss Payments
Because second mortgages and HELOCs are home equity loans, inability to pay your debt can mean losing your home according to the terms you agreed with. A lot of people can forget this crucial detail so be sure that you fully understand the loan terms you’ll sign for. Remember that a secured loan means that if you leave it unpaid, the lender can take the security.
Second Mortgages and HELOCs Are Not Without Pitfalls
Home prices are rising up and this equated with a lot of people becoming rich on paper because their home equity has gone up faster than anticipated. However, just because you can tap into your home equity does not mean that you should max it out. It is still best to borrow an amount that you’re sure you can pay to avoid repayment issues later. Note that the bigger the debt, the bigger the interest rate is as well.
Home Renovations Remain a Favorite
Do you know that HELOCs were originally meant to help homeowners finance home renovations that can, in turn, increase the value of their property? Though an increasing number of borrowers use HELOCs for something else, a lot still consider getting a HELOC to fund home renovations. The same goes for second mortgages, more so if the planed home renovation is meant to be an extensive one.
Second Mortgages and HELOCs Also Require Financial Planning
Even though you are doing okay now in terms of cash flow, things can change drastically in a matter of months. With this said, it is important to know possible changes in the interest and payments that the lender may initiate before you even sign for your home equity loan. Understand that although second mortgages and HELOCs are easier to apply for, especially if borrowing from private lenders, they are still loans and have to be paid on time according to the terms you agreed with.