First Choice for a Second Mortgage: Home Equity Loan or HELOC?

Richard Barrington
LoanBiz Columnist

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Homeowners who have made some progress paying down a mortgage and are thinking of accessing cash via a home equity loan may choose a fixed second mortgage or a home equity line of credit (HELOC). Each has distinct differences which impact interest rates and closing costs, and the decision depends on the purpose to which the funds will be put.

When to Consider a HELOC

A HELOC is a line of credit in place to borrow against as needed. It requires only a single application that, once approved can make the credit available for years. This means there is only one set of closing costs, even though the homeowner may access and pay down the credit several different times. HELOCs also confer the advantage of only requiring interest on the amount of credit in use.

Borrowers who anticipate varying needs for cash in the years ahead should consider a HELOC. It offers flexibility and the ability to draw and repay funds as needed. The downslide of a HELOC is that the rate and payments vary according to the amount of credit used and the conditions of financial markets. This disadvantage can be somewhat offset with HELOCs that allow borrowers to fix their rate at one or more times during the life of the loan.

When to Consider a Home Equity Loan

A home equity loan is what one would conventionally think of as a second mortgage. It offers the opportunity to lock in a fixed interest rate, and is best suited to situations where a lump sum is needed, such as for debt consolidation or a large medical expense.

As with any mortgage, both home equity loans and HELOCs are secured by homes, so budgeting before borrowing is a must!

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.

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