If you’ve decided that you need a little bit of financial help, and that your home is where to get it, you may have some options. For example, you could apply for a home equity line of credit (HELOC), which is also called a home equity loan. You can also take out a second mortgage, which is similar but not exactly the same thing. It’s important that you understand the difference between second mortgage and home equity loan options, though, so you can choose the one that’s going to be best for you. Talking with your lender can help, but at the end of the day the choice will be up to you, and qualifying for either one is going to require similar information and financial stability.
1). What is a second mortgage?
A second mortgage is exactly what its name implies. You already have a first mortgage on your home, and you’ll be given a second one. That mortgage can only be acquired if you have the equity for it, though, since it’s not on top of your first mortgage but in addition to it. In other words, you can’t use the same equity in the house you used to get your first mortgage, because that equity is now taken up by that mortgage. If you have additional equity, though, over and above what you owe on your first mortgage, you can take out a second mortgage and get the cash from that equity to do something with. It doesn’t matter what you want the money for, but whether you can qualify for it does matter to the lender. It’s a fixed amount that you’ll pay back over a set period of time.
2). What is a home equity loan?
You can also use the equity in your home for a HELOC. That allows you to be more flexible, since it’s a line of credit as opposed to a set amount on a mortgage. In other words, if you get a home equity loan for $50,000, you don’t have to use all of that money at once. That’s how much you can borrow, not how much you actually borrowed. It’s like a credit card, with your house as the credit line. Some people max out their equity loan and then just make payments on it like they would with a second mortgage, while others use it differently. They may borrow some against it to do a particular thing, and then they will pay it off and borrow again. There’s on right or wrong way, and it can be used in the way it works best for your needs.
3). How can you choose the best option?
The best option between a second mortgage and a home equity loan is the option that’s going to give you the best rate and terms while adequately meeting your needs. Consider both options carefully, and talk to your lender about what you want to accomplish. People who are working on their home and making improvements often opt for a home equity line of credit, so they can borrow as needed. That way they don’t have to borrow more than is actually necessary, and that can keep their payments lower. They may have a higher interest rate with this option, though. That’s why working with the right lender to get the loan or mortgage for your needs is so very important.
4). How does your credit look?
Your credit will also play a big role in whether you can get a second mortgage or a home equity loan. If you don’t have perfect credit you can still qualify, but you want to make sure your credit is as good as possible. Check to see if your report has anything negative on it, and see if there are mistakes you can have corrected. Reduce your debt load, and ensure that all of your bills are paid on time. That way your credit will look better to your lender, so you can get a better interest rate and have a higher chance of being approved.
5). Are you ready to make financial changes?
By financing your house, you put it at risk of loss. If you can’t pay your mortgage, the bank will take the home back. A second mortgage or a home equity line of credit increases the risk of losing your home, so you want to make sure you’re careful about getting one. That doesn’t mean they’re a bad idea, or that they won’t work well for your needs. It’s just important that you understand the risks so you can make the right financial decision for your situation. By doing that, you’ll feel much more comfortable with your finances in the long run. How much money you need also matters, since some lenders have limits on how high their home equity loans will go. To reduce your risk, only borrow what you really need, not as much as the lender will give you.
2 Point Highlight
If you’ve decided that you need a little bit of financial help, and that your home is where to get it, you may have some options.
The best option between a second mortgage and a home equity loan is the option that’s going to give you the best rate and terms while adequately meeting your needs.
