First, to avoid any confusion, let’s make this clear: a home equity line of credit (or HELOC) is, in fact, a type of second mortgage. However, it is often perceived as something different due to the way that a HELOC is structured.
Unlike traditional mortgage loans, a HELOC grants the homeowner access to an ongoing line of credit that they may withdraw from as they please. A second mortgage loan that is not a HELOC provides the homeowner with a single lump sum payment of their loan amount. This is the most fundamental difference between second mortgages and home equity lines of credit.
When to Consider a HELOC
This type of mortgage loan is popular among homeowners who plan to make a series of big renovations to their property. This is often done with the intention of selling the house sometime later, as the repairs and upgrades are likely to increase the value of the home. Home equity lines of credit are used in these scenarios because the homeowner may withdraw funds as needed for the project of the moment, which can make it easier to keep track of your renovation budget.
A HELOC is ideal if you are requesting a smaller amount that you feel confident about paying back in a timely manner, or if you are not sure exactly what you will need to purchase with the money you’re getting from the loan.
When to Consider a Lump Sum Second Mortgage Loan
Lump sum mortgage loans are largely considered by those who need to make large investments all at once toward their property, their debts, or their future. One common example of these situations is when someone in the household is going to college. This money can be used to pay the tuition and other fees, and the resulting degree may further the person’s overall financial standing.
A lump sum is also a viable solution for those looking to consolidate their existing, unsecured debts. Oftentimes, the interest rate on a second mortgage loan is lower than the interest rates of many credit cards and loans from other institutions. This is why so many homeowners turn to second mortgages to handle other areas of their life where they have accumulated debt.
Second mortgages and home equity lines of credit are similar in the way that they grant homeowners access to the equity of their homes. The essential difference is how the money is dispersed, which effects the applications of the funds once the request for a loan has been approved. Both can be great options for investment into your property or your future, but one must consider both options carefully before making a final decision.