You need to take up a second mortgage or home equity loans by tapping into your home equity so that you could pay for your children’s college tuition, for your medical bills or to repair your home. Maybe you need to consolidate your debts. Whatever your reasons, there are two main types of loans that you could choose from. Here are more information and a closer look at the two most preferred loans:

Home equity loan

You need to know what is a home equity loan first before you choose between it and HELOC. This type of loan is a second mortgage or a closed-end second mortgage. When you take up a closed-end second mortgage, you decide on the amount you need to borrow, close the loan and get the check for the amount you wanted. Then, you will need to make regular monthly repayments over a specified period. When you completed payment of the full term of the loan, the loan is then paid in full and you do not owe the lender any money any more. But if you feel that you need more money a few years into the loan term, you won’t be able to withdraw more money. Instead, you may need to take up another equity loan and go through the whole process again at additional costs. The interest paid on this equity loan is also tax deductible. As with any mortgage, you use your property as collateral to secure this loan so if you were to default in the monthly payment, you could risk losing your property. The lender has the legal right to come in, foreclose on your property and auction it off to settle the loan you were unable to complete paying.

HELOC

A HELOC is a home equity line of credit and while it is almost like a second mortgage, some of its terms are different. It is a combination of a credit card and an equity loan as it is a secured loan as opposed to the unsecured loan of credit cards. You are also using your property as collateral to secure the loan. However, unlike the closed-end second mortgage, you can withdraw additional money a few years after taking up the loan. You only need to sign up for a HELOC once and you can withdraw additional money later if the need arises. For example, if you sign up for a HELOC for $100,000 and after a few years, you have paid about $20,000 on the principal. This means you can withdraw the $20,000 if you suddenly need the money for other purposes. Meanwhile, you will continue to make your monthly payments. This type of loan is useful if you are investing in home repair where you may need more money to cover unexpected expenses or you are investing into a business and you foresee needing more money for expansion several years later. You may even be able to secure a HELOC with a low interest-only payment which will allow you to borrow more and still have a manageable payment amount each month. The interest you pay on this loan is also tax deductible.

Now you know more about these two types of loan, it is easier for you to decide on one that suits your needs the most. You can also check with your loan officer or financial planner on the home equityloan requirments so that you know what to expect before submitting your application.

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Category: Finances
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