September 10, 2010, Newsletter Issue #235: Second Mortgage Different From Home Equity Line-Of-Credit (HELOC)?

Tip of the Week

They will both technically be “second mortgages” but they operate differently. The similarities:

Both are based on the equity in your home – the value of the property minus the balance of your first mortgage. Both will have a repayment term normally from 5 to 15 years. The differences:

Second: The full amount of the loan disbursed at closing.
HELOC: Little or no funds disbursed at closing. Second: You’ll receive a regular monthly payment repayment schedule. Pay interest on full loan amount from inception.
HELOC: Usually an interest-only payment due on outstanding balance at month end. You choose how much extra money, if any, to apply to principal. Second: The rate is usually fixed as is the payment.
HELOC: The rate is seldom fixed, able to fluctuate as often as monthly. Second: You have the use of entire loan balance funds after closing.
HELOC: Using checks, you can disburse funds up to your balance in amounts and at times you wish. Although both are normally second mortgages because of the order in which they are recorded, they are quite different in operation. Often a HELOC is used for home improvement projects or as “insurance” for future needed cash by the borrower.

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