February 19, 2018

Second mortgage vs. Line of credit

Second mortgage vs. Line of credit: Options to make homes affordable
The housing market has been recovering at a steady rate. This has thrown open a wide variety of lucrative options for the homeowners. This is why many of them are planning to take advantage of the conducive market trend to improve their home affordability.
One of the best ways to do so is to take out a second mortgage or a home equity line of credit. Though both of them can provide a homeowner some very good amount of instant liquid money, yet one has to weigh his/her options well before jumping onto any conclusion.
Mortgage market trend as of July 2013
Steadily increasing home prices along with increased household incomes have provided consumers with an added dose of wealth and equity to their assets. In short, growing number of homeowners has been able come out of being underwater on their loans and are well above the surface comfortably.
According to an estimate from Zillow, around 2 million homeowners have been able to successfully rise above water. Alternatively, CoreLogic’s estimates show that during the first three quarters of 2012, almost 1.4 million mortgage borrowers emerged out of water.
Apart from that, a report on the number of underwater homeowners prepared by J.P Morgan Securities show that it fell from 11 million to about 7 million through the year 2012.
The purpose of using fresh mortgage loans
Lenders had already predicted such a kind of turnaround and so, they are once again providing affordable home equity loans to homeowners. There are some homeowners who had to postpone their requirements and wants just because of the dismal performance of the U.S. economy.
For that reason, those of who had plans to remodel their homes or were planning to defend their savings from the adverse effects of tuition bill that may usurp their nest egg, then they may use a home equity loan to achieve this objective. However, prior to doing that it is important that they are aware of the outcome of their choice.
Second mortgage vs. line of credit – Which one is better?
A home equity line of credit or HELOC provides a lot more flexibility than second mortgage. Through a line of credit, you can tap into the ready pool of cash – your home, whenever you feel like. In order to meet financial obligations like tuition fees, medical debt, home improvement project or any other type of recurring debt, a HELOC is comparatively a better alternative.
On the other hand, second mortgage is more of a conservative as well as predictable type of credit. In case you prefer to stay conservative and support the concept of borrowing a fixed amount of money, then a second mortgage is just right for you. This type of loan will have you to make fixed monthly debt payments within a definite term.
A second mortgage will always have a fixed rate of interest, whereas that of the HELOC will be an adjustable or variable one. Comparing the two, one of the biggest drawbacks of second mortgage is its high rate of interest than HELOC.
The reason for this is that second mortgage loans carry fixed interest rates on them but this is not the case with HELOC. In a line of credit, you’ll be offered lower rate of interest on the loan initially in anticipation of a changing mortgage market trend.
Therefore, if the market rate increases, so will the rate on your HELOC and vice-versa. The interest rate on your HELOC will be adjusted on a monthly or quarterly basis.
Still, prior to choosing a particular type of mortgage, you should consider asking yourself some of these questions to arrive at a judicious conclusion:
• How long will be my loan’s maturity period?
• How much monthly loan repayment amount can I afford?
• What will be the most opportune time to use my home’s equity?
• Will HELOC make me careless with my spending behavior since it functions like a checking account or charge card?
• What is the purpose of such a loan?
So, before you choose any one out of the two – HELOC or second mortgage, just make sure to weigh your options well before that, keeping your retirement goals in mind.