Should I get a Line of Credit or Second Mortgage?
By Bob KieberYour credit card payments have risen, the car needs a new transmission or you found that perfect vacation home, so how do you finance such expenses? If you are a home owner the answer may be a Home Equity Line of Credit or a Second Mortgage.As a home owner hopefully you have some equity in the home. Equity is the value of the home minus the amount you owe on any mortgages on that home. As an example Ms. Natalie Dressed purchased a home a few years ago. She paid $275,000.00 for the home and may a down payment of ten percent, $27,500.00.The home is now has an appraised value of $320,000.00. Ms. Dressed now has over $72,500.00 in equity in her home. That figure comes from the down payment she made when the home was purchased and the increase in value of the home since the purchase date.Ms. Dressed has decided that it is time for a new car and to contract for a couple of home improvements. She has money in the bank to pay for most of those items but she does not want to deplete her savings account. So what does she do? A Home Equity Line of Credit or a Second Mortgage? In her meeting with her lender she learns that there is a distinct difference between the two mortgages. The Home Equity Line of Credit is a loan that’s interest rate is based on some index, such as the Prime Rate. Prime Rate is the interest rate that banks charge to their most creditworthy customers. This rate does and will go up and down, depending upon the actions of the Federal Reserve Board. Right now the Prime Rate has been rising.Then there is a Second Mortgage available to Ms. Dressed. This is a fixed rate mortgage and the interest rate does not change. Second mortgages are based on a fixed amortization period, such as ten fifteen or even thirty years.One other difference between the two types of mortgages is the payment. Home Equity Lines of Credit (HELOC) generally require the borrower to pay a minimum of interest only. Whereas a Second Mortgage is a Principal and Interest payment. And those payment figures can have a wide difference.Ms. Dressed has determined that it would be in her best interest to obtain a Second Mortgage in the amount of $40,000.00. The interest rate on the Second Mortgage will be locked in for thirty years and after fifteen years she will need to pay off the remaining balance or refinance the amount outstanding. Her decision was based on the interest rate being locked in and with rates rising on the HELOC’s she felt that the security was right for her.For those current HELOC borrowers out there should consider looking into refinancing to a Second Mortgage as the interest rates should be lower and you will lock in an interest rate that protects you from further rise in the Prime rate. Contact me or your friendly neighborhood mortgage lender to learn how and if the switch would be a wise move for you financially. For answers to your mortgage related questions call Bob Kieber are (970) 262-1199 or e-mail him at email@example.com. Bob is a local mortgage lender and principal of Resort Lending. He has 30-plus years of professional experience in real estate, finance and investments, and is a longtime resident of the High Country.
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