Anyone who got a mortgage prior to the middle of 2022 probably has an interest rate below 5%. With first mortgage rates still upwards of 7%, many homeowners who want to use their equity for home improvements, to consolidate debt, buy another property or just have some extra cash set aside for unforeseen expenditures are not willing to give up that nice low rate!
Enter the second mortgage market! There are 2 different ways to access your equity through a second mortgage which won’t affect your first mortgage. Those are “stand alone second mortgages” and “Home Equity Lines of Credit” i.e., HELOC’s.

So what is the difference? There are several.

A stand-alone second works just like a first mortgage. You get a lump sum of money at a fixed rate for a set period of time. You can use the money for whatever you wish. You can get a fixed rate for as long as 30 years to as little as 10 years. You make the same payment every month and know that when the term is over, the loan is paid in full. There are typically no prepayment penalties on these kinds of loans.

A HELOC on the other hand is quite different. They work a lot like a credit card. They are adjustable rate mortgages and the rate will change monthly. You can access the line of credit for the first 10 years and only pay interest on what you use. You are not required to pay back the principal until the 11th year. Often times banks who offer HELOC’s restrict what you can use the money for, carry an annual fee and may have an early payoff fee.

How do you decide which is better for you? A lot of it has to do with what you plan to use the money for. If you want to have a reserve account for unexpected expenditures or small home improvement projects, the HELOC may be a good option. If you are planning to consolidate debt, buy another property or do large-scale home improvements, the stand alone second mortgage is probably a better option.

What it really boils down to is your ability to manage your credit. While HELOCs have the benefit of paying interest only on what you use, if you don’t establish a repayment plan that takes into account paying off the principal as well, you could get yourself in a jam in the 11th year.
Whatever direction you decide to go, be sure to discuss the details of these options with a Loan Officer first. Products vary from bank to bank so shop around and be sure to talk with someone who understands and offers, both.