HELOCs & Second Mortgages

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If you have equity in your home and need access to cash, a Home Equity Line of Credit (HELOC) or a second mortgage can help you tap into that value without refinancing your existing first mortgage. This is especially valuable if you have a low rate on your current mortgage that you want to keep.

What is a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving credit line secured by the equity in your home. It works similar to a credit card: you are approved for a maximum credit limit, and you can draw funds as needed up to that limit. You only pay interest on the amount you have actually borrowed, not the full credit line.

HELOCs typically have two phases:

• Draw Period (typically 5-10 years): During this phase, you can borrow and repay funds as needed. Most HELOCs require interest-only payments during the draw period, keeping your payments low.
• Repayment Period (typically 10-20 years): Once the draw period ends, you can no longer borrow against the line. The outstanding balance converts to a fully amortizing loan with principal and interest payments.

HELOCs carry a variable interest rate, typically based on the prime rate plus a margin. This means your rate and payment can change over time as market rates move.

What is a Second Mortgage (Home Equity Loan)?

A second mortgage, also called a home equity loan, is a fixed-rate loan taken against the equity in your home. Unlike a HELOC, you receive the full loan amount as a lump sum at closing and repay it with fixed monthly payments over a set term (typically 10-30 years).

Second mortgages are ideal when you need a specific amount of money for a one-time expense and want the predictability of a fixed rate and fixed payment.

HELOC vs. Second Mortgage

Common Uses

• Home improvements and renovations
• Debt consolidation (paying off high-interest credit cards or other debts)
• Education expenses
• Investment opportunities
• Major purchases
• Emergency fund access
• Down payment on a second property

General Guidelines

• Combined LTV (CLTV): Most programs allow a combined loan-to-value of up to 85-90%. This means your first mortgage balance plus the HELOC or second mortgage cannot exceed 85-90% of your home's appraised value.
• Credit Scores: Typically 620-680+ depending on the program.
• Equity Required: You must have sufficient equity in your home after accounting for your existing first mortgage.
• Property Types: Primary residences and second homes are typically eligible. Some programs allow investment properties.
• Tax Deductibility: Interest may be tax-deductible if the funds are used for home improvements. Consult your tax advisor for your specific situation.

Keep Your Low Rate

One of the biggest advantages of a HELOC or second mortgage is that you do not have to refinance your first mortgage. If you locked in a low rate on your existing mortgage, you can keep that rate and simply add a second lien to access your equity. This is often a smarter financial move than doing a cash-out refinance at today's higher rates.

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