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There are two ways to take
out a second home mortgage: the first is to obtain another traditional Home
Equity Loan; the second is to take out a Home Equity Line Of Credit (HELOC).
Both types of loan are secured by your home’s value (that is why they are
both called a “second mortgage”) and in both cases lenders assess your
property to determine how much they are willing to extend. The amount is
determined by taking the assessed value and multiplying by a percentage
figure, known as the loan-to-value ratio. Traditionally this can be as high
as 80%.
With a Home Equity loan you borrow a fixed amount of
money with a fixed interest rate; monthly payments are also fixed and are
calculated to cover interest and repay the loan balance over the loan
term (i.e. it is self-amortizing). This type of loan works best when
you know exactly how much money you need to borrow e.g. if you are making
home improvements where costs are known in advance, or are using the loan
for debt consolidation.
A HELOC is more flexible because you can borrow up to
the line of credit, pay the balance down and borrow the money again over the
term of the loan agreement. It usually has a variable interest rate and is
not self-amortizing, so if you only make the minimum monthly payments
you could find yourself left with a large chunk to pay at the end. It is
most useful where you do not know in advance how much you need to
borrow, since its flexibility means that you can access money repeatedly and
in varying amounts, as needed. |
