If you are considering a second mortgage then one of the options that should be considered is a second HELOC. A HELOC is a Home Equity Line Of Credit and works a bit different from a standard second mortgage. HELOCs offer the flexibility of being able to draw the funds you need over a designated period of time instead of receiving the funds in one lump sum. The second HELOC method of obtaining money has some distinct advantages and disadvantages.
Advantages of a second HELOC
The primary advantage of a HELOC is the ability to draw only the amount suited for your current needs. This way a borrower can avoid taking on too much debt. Since the interest is due only for the funds that have been withdrawn from the HELOC, some cost savings can be realized.
Second HELOC pitfalls
There really is only one big disadvantage to choosing a second HELOC over a standard second mortgage. The interest paid on a HELOC product is variable, and tied to the prime lending rate.
This means there is no guarantee that a low interest rate today will still be there in the future. Since the interest on a second HELOC is calculated on a daily basis, the payment will also change.
Other second HELOC considerations
If the housing market slumps, it is not unusual for a bank to lower or rescind the amount of funds that are available on your second HELOC. This is obviously a problem if your kitchen remodel project is only 70% complete. HELOCs are most appropriate when used for things such as college tuition, improvements to your home or paying off high interest credit card debt. Another thing to consider is that often times the up front costs for receiving the second HELOC loan are lower than the fees associated with a standard second mortgage.
When you are considering a second mortgage or second HELOC, take the time to evaluate your need for the funds and your comfort level with a variable interest rate. The flexibility advantages may outweigh any concerns about interest rate. If so, a second HELOC is probably just right for you.