One of the best ways to increase the market value of your home is to do needed repairs and make improvements. If you have the capital to do it, you can add value that’s worth a lot more than the money you spend.
The trick, of course, is finding the money to make improvements. Two of the most popular options are second mortgages and home equity lines of credit, or HELOCs.
There are some key differences between the two. Here’s what you need to know.
What You Should Know About Second Mortgages
Second mortgages are a popular form of refinancing. Here are the key characteristics of a second mortgage:
1. A second mortgage is an option only if you have a first mortgage in place. It’s a loan that’s meant to be separate from the initial mortgage on your home.
2. A second mortgage can be defined as any loan that places a second lien on your home in subordination to your primary mortgage.
3. The interest payments for second mortgages are tax deductible.
4. Second mortgages are nearly always distributed in a lump sum payment. You should expect to get a one-time payout, which you can then use to make improvements to your home, pay off debts, or for any other purpose.
It’s even possible to use the funds from a second mortgage to pay off a first mortgage, but that’s an option that makes sense only if your interest rate is low and you won’t be penalized for early payments on your first mortgage.
What You Should Know About HELOCs
The second option you have if you need money to make improvements to your home is a Home Equity Line of Credit, or HELOC for short. A HELOC differs from a second mortgage in some important ways. Here are the most important characteristics of a HELOC:
1. Unlike with a second mortgage, there is no lump sum payment with a home equity line of credit. They are considered revolving lines of credit, which means that you can draw down on the line when you need to and repay it. You can draw on the line as often as you want provided you don’t exceed the limit and the line is in good standing.
2. It can be helpful to think of a HELOC as a debit card. It’s a good choice if you’ll be paying many contractors to do work on your home or you plan to purchase materials on your own. It’s a flexible payment option.
3. You do not need to have a first mortgage in place to get a HELOC. Some people who have already paid off a first mortgage choose to get a HELOC to make improvements to their homes. A HELOC can also function as an alternative to a second mortgage when there is still a first mortgage on your home.
4. As is the case with a second mortgage, the interest you pay on your HELOC is tax deductible.
The interest rates on a HELOC can vary depending on your credit history.
Which Option is Right for You?
The big question for many homeowners is this:
Is a HELOC a better refinancing option than a second mortgage?
Here are some key questions to ask:
1. Do I need to make a large lump sum payment to one person, or would I rather have the flexibility to make multiple payments over time?
2. Do I need money in case of emergencies?
3. What interest rates are available and how do they compare between HELOCs and second mortgages?
If you need to pay vendors over time or simply want to have the option of borrowing, then a HELOC is probably the better choice for you.
The bottom line is that both HELOCs and second mortgages can be good refinancing options. The primary differences are the way the funds are dispersed and how you may use them. You’ll probably pay less interest over time with a HELOC, but you won’t be limited in how you use the money if you opt for a second mortgage.
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