Despite the numerous dissimilarities between a second mortgage and a home equity loan, it is still common for homeowners to be flummoxed when required to tell the difference. Second mortgages are a type of home equity loan; however, home equity loans are usually termed as a line of credit. Which brings us to the question ? which is the best choice, a second mortgage vs a home equity loan ? and we shall try to answer this question with as much pith and substance.
What would be necessary, first and foremost, would be a proper delineation of each option ? the second mortgage and the home equity loan.
Second Mortgage Vs Home Equity Loan Comparison
A second mortgage would involve the payout of a fixed amount of money, either in the form of a line of credit, monthly installments or on a lump-sum basis. It is then paid back in a particular schedule just like the original mortgage. Notwithstanding refinancing, second mortgages are not supposed to be used in lieu of an original mortgage.
Most of the time, a second mortgage would have a life of loan, or terms that falls between five and thirty years, with the interest rate being fixed. There would also be some congruence with original mortgage loans in the sense that both the points and interest rate are based on factors such as the house?s price, the current interest rate and the individual?s credit history. While the interest rate on a second mortgage is often higher, the fees are usually lower.
In contrast, home equity loans are similar to the credit card, and may even include credit cards for making purchases. When an individual has equity on the house, he or she can acquire extra cash by means of the home equity loan.
An individual can pay these loans simultaneously or in smaller increments. Several individuals would get their monetary infusions through the line of credit, allowing them to withdraw money any time necessary. Another significant congruence with credit cards, would be the specific interest rate charged on home equity loans and the amount that can be borrowed based on the individual?s repayment capacity.
For determining the limits of a home equity loan, the lender would gauge appraised value of the house and start calculations at 75 % of the given value. After completion of the appraisal, the lender would remove the balance outstanding owed on the given mortgage.
A person?s financial needs would be a good basis for the type of loan selected. If money were required for a one-time expense, like paying for wedding preparations, it would be best to go for fixed-rate second mortgages.
A home equity loan line of credit, on the other hand, would be the most suitable option to choose if additional money would be needed on a repeated basis. Line of credit lets homeowners borrow money whenever needed and, if repayments were done equally quickly money would be more likely to be saved compared to second mortgages.
Moreover, it is essential to take into consideration the spending habits of an individual. If an individual who has a predilection for making frivolous purchases is handed out an additional credit card, a home equity loan line of credit could be quite a disconcerting thought to ponder.
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