Choosing between Line of Credit and Second Mortgage

For those that own a home, there are multiple options when a financial need arises that requires them to obtain additional money in the form of a loan. Home Equity Loans come in two different forms: the Second Mortgage and the Home Equity Line of Credit.

A Line of Credit is different from a loan in that after it has been established, you have the option of borrowing from it at any time and repaying it within the given payment structure (very similar to a credit card). A second mortgage is a more traditional loan, providing a large loan that you then repay within a set period of time.

 

When deciding which option is best for you, there are many options to consider. The following three criteria are vital to making sure you get the right loan on your home.

Flexibility of the Loan
Lines of credit are always more flexible than traditional loans. You can borrow however much you want (up to your maximum) whenever you want and repay it via monthly installments. A second mortgage requires a set period of time and a lump sum with a single contract. If you need a second lump sum of money, you will then have to apply for a second loan. If the need for money arises due to ongoing, regular expenses, a line of credit is a better option. For those looking to pay for a single, one time expense, a mortgage loan may be best.

Careful Borrowing
Much like a credit card, a line of credit can easily be misused. Because it is open ended, it becomes easy to start borrowing against it more often than needed and spending more than you can repay. For those who want something secure and easy to keep track of, a second mortgage provides a one time sum that will never change.

The Rates
The interest rates are a vital aspect of any loan and for those trying to decide between a line of credit and a second mortgage, it can make a big difference. Most often, a line of credit will have a lower interest rate; however it can be more variable than a loan's rate and the repayment amounts will stretch on, beyond the terms that a mortgage might.

Choosing between a line of credit and a mortgage loan generally comes down to deciding what you need the money for and how responsible you feel you can be with that money. If you need the money for a one time cost, such as starting a business, repairing your home, or going on vacation, a mortgage is probably best. If you need ongoing money for bills, tuition, or something else, a line of credit is more flexible about how much you can borrow. The best way to decide is to sit down and analyze your specific situation.




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