Traditional | California Current

Last week I gave you 5 reasons why a HELOC still makes sense, but today I’m going to revisit a homeowner’s option when it comes to finding a second mortgage. The two main options available are a traditional second-lien mortgage and the ever popular HELOC. But before settling down with either loan, it’s important to find out what each option has to offer you.

Traditional Second-Lien Mortgages
Traditional second mortgages are pretty basic and are about as traditional as can be for a mortgage - except that it is in second-lien position. Typically, these loans offer fixed interest rates for the life of the loan making it a much more stable and traditional loan since there will be hardly any surprises. At closing, the borrower receives all the funds in one lump sum payment. You will find that many home buyers will use a traditional second mortgage so they can make a smaller down payment but still avoid paying mortgage insurance.

Key Highlights of the Traditional Second

Fixed interest rates
Stable monthly payments
Receive funds in one-lump sum at closing
Great for immediate needs [debt consolidation, medical bills]

Home Equity Line of Credit [HELOC]
On the other hand, HELOCs are quite similar to the way credit cards are issued. Instead of a loan that is paid out in one lump sum at closing, you are issued a credit line based on the equity of your home. Now, your initial draw could be for the whole amount, but typically most of the credit line is left untouched and saved for the future. In addition, lenders will issue debit cards and checkbooks which will allow you to tap into these funds at a moments notice. No more paperwork or chatting with customer service, your equity is now easier to access than ever. But, HELOCs do come at a certain cost because of this flexibility. Most notably, HELOC interest rates are adjustable since they are tied to the markets Prime Rate. As a result, payments are susceptible to market forces making them much more volatile than traditional seconds.

Key Highlights of HELOCs

Greater flexibility
Great if you are anticipating the need for cash, but don’t need all of it immediately.
You only pay for what you borrow, not the entire credit line
Available for future needs [home improvements or repairs, college tuition, business investments]
Adjustable interest rates tied to Prime Rate
Sucsceptible to HELOC Freezes [frozen credit lines due to declining home values]

Which to Choose
There are no set answers and choosing the best option will largely depend on your financial situation. For those who prefer stability and have no need for an extended credit line, choosing a traditional second mortgage may just be the right choice. On the other hand, HELOCs have grown quite popular because of their increasing flexibility and currently low interest rates. In addition to comparing the aspects of each loan, you want to focus on your needs and your long term plans both for you and your home. For more information, speak to a mortgage broker in your area and read more about qualifying for a home loan today.