QandAs: Loans

What is the difference between a Home Equity Line of Credit and Second Mortgage?

Answer:
Although a home equity line of credit is a type

of second mortgage, this loan option differs from traditional second mortgages.

One of the biggest perks of homeownership is the chance to borrow money for future use. You can sell the home and profit, or tap into your equity and pay off debts or renovate the home.

With traditional second mortgages, borrowers apply for a loan and receive a one-time payout from the lender. Most second mortgages have fixed rates. Thus, monthly payments remain the same.

A home equity line of credit doesn’t involve one-time payouts. Rather, applicants are approved for a line of credit, in which they can withdraw funds for a period of up to 10 years. This type of home equity loan works like a credit card. Monthly payments aren’t predictable like traditional second mortgages.

Since borrowers are free to withdraw as much or as little cash, monthly payments vary. Plus, most home equity lines of credit have a variable rate. Many homeowners prefer this type of loan because the money is available on an “as-needed basis.” The line of credit can function as an emergency savings account, or borrowers can use the money to consolidate debts and improve their credit score.


	more Q&A sessions like this
	What is a second mortgage? What is a Home Equity Line of Credit or HELOC? Can you convert a Home Equity Line of Credit into a Second Mortgage? Is a home equity loan considered refinancing? Is interest on a home equity loan tax deductible? How can I pay for a home improvement project? What Does Borrowing Against my Equity Mean? What does HELOC stand for? Is Interest on a Home Equity Line of Credit Tax Deductible? What are the different types of Mortgages? What is a Leaseback? Where can I get cash for a remodeling project?