The first type of home equity loan offered by Guardians CU is a Second Mortgage. This loan is delivered to the borrower in one lump sum at one time, with a fixed interest rate. This is very similar to a regular mortgage or auto loan. You get a specific amount and have to pay it back according to a set schedule. Second mortgages are usually the best choice when you know how much you need and want the ability to pay over a long period of time.
The second type of home equity loan offered by Guardians CU is a Home Equity Line of Credit (HELOC). This is a line of revolving credit with an adjustable interest rate, great for short-term borrowing or unexpected costs such as a medical emergency. The borrower can choose when and how often to borrow money. Guardians Credit Union will set a preliminary limit to the credit line, possibly giving the borrower access to up to 80% of the value of their home depending on credit history, less any liens. HELOCs have sometimes been compared to credit cards, in that you're given a limit. Paying off your debt will then free up more credit. Just like a credit card, you pay interest on the amount you borrow.
A Fixed Home Equity Loan (Second Mortgage) or a Home Equity Line of Credit otherwise known as a HELOC may be an excellent way to utilize the equity in your home in order to:
Renovate your home or cover home repairs
Consolidate debts with high interest rates into one lower interest rate loan
Pay for medical bills
Pay for college education
How do home equity loans work? Essentially, you can tap into the equity of your property for various purposes, usually to pay for a large cost that you wouldn't otherwise be able to cover. Equity is determined by the market value of your home versus how much you owe.
Home Equity Loan Comparison
Second Mortgage
Home Equity Line of Credit
Advantages
Interest rates are locked in over the life of the loan for most Second Mortgages. Homeowners don't have to worry about unexpected rises in their mortgage monthly payments.
If you don't know for sure how much money you will need over a period of time, a HELOC allows the borrower to take advances as they need. As you pay it back, it frees up more credit.
A borrower will typically enjoy lower monthly payments since the period of the Second Mortgage is usually longer, such as 15 years.
Borrowers typically have lower monthly payments versus a Second Mortgage.
Since a Second Mortgage loan is a one-time, lump sum, some homeowners may find it easier to avoid additional debt versus a HELOC where you can continuously draw down money from the loan
Borrowers usually enjoy a lower interest rate since this is a variable cost loan.
Good Choice If
You prefer fixed monthly payments that won't change.
A lower interest rate is more important than the possibility of an increase in your monthly mortgage payment.
A longer loan term is necessary.
It is uncertain how much money you will need to borrow and when.
Disadvantages
Since Second Mortgage loans are fixed rate loans, if interest rates fall, the borrower will end up paying more in interest versus a HELOC which usually uses a variable rate that adjusts downward.
A borrower will not have the security of locked in payments. As interest rates change, so will the monthly payment.
Since the life of the loan is longer, for example 15 years, you end up paying more in interest.
A HELOC has a shorter loan length which will require faster payment.
You only receive money one time, so if additional costs arise, the borrower would need to apply for a new loan or consider refinancing.
