A second mortgage is essentially a secured loan that capitalizes on the equity you've built in your home. The amount you can borrow through a second mortgage is typically derived from the difference between your home's current market value and the outstanding balance on your primary mortgage.
There are two distinct types of second mortgages:
Home Equity Line of Credit (HELOC)
This functions much like a credit card for homeowners. Instead of a lump sum, you're granted a line of credit based on your home's equity. You can borrow up to this limit for a set period known as the draw period, which typically spans 5 to 10 years.
During this time, you pay interest only on the amount you borrow. You can opt for a HELOC with a capped interest rate to shield yourself from rising interest payments. After the draw period concludes, you enter the repayment phase, typically spanning 10 to 20 years, where you must pay back the borrowed sum along with the accrued interest.
Home Equity Loan (Refinancing Your Mortgage)
This involves replacing your existing mortgage with a new one, potentially at a different interest rate or term. Opting for a "cash-out" refinance increases the amount you owe but provides a lump sum of cash for your discretionary use.
Home equity loans usually feature a fixed interest rate, ensuring consistency in your monthly payments. They also adhere to a fixed repayment schedule, meaning you'll make the same monthly payment throughout the loan term.
When it comes to second mortgages, both the HELOC and the home equity loan have unique strengths tailored to specific needs. Speaking to your financial advisor or real estate agent is recommended when considering which one to choose. As always, feel free to contact me if you have any questions!