The Difference Between a HELOC, Second Mortgage, or Cash Out Refinance

There are plenty of lenders out there eager to offer you a home equity loan. They’re going to want you to take the loan that works best for them, which is why it’s important to know before you get your loan which type will be best for you. The reason for the loan is as important as the interest rate and monthly payment. Other concerns include your spending habits and credit rating. Once you’ve figured out the best loan for your needs, you can shop around to find the best interest rates and fee packages available to you.

HELOC, Second Mortgage, and Cash Out Refinance Pros

HELOC – a HELOC, or home equity line of credit, is a flexible loan with a variable interest rate that allows you to take out as much or as little money as you need with a “credit” card or checks.

Flexibility is perhaps the greatest pro with the HELOC. Because you can use as much or as little as you need at any given time, you don’t have to take out a loan that is too big for you.
If you know you’ll need extra money on a reoccurring basis, such as for tuition or an ongoing home improvement project, you should look into a HELOC. Second mortgage and cash out refinance are traditional loans in the sense that you borrow money in a lump sum.

Second Mortgage – Your lender will disburse the fund for your second mortgage, which usually has a fixed interest rate, in full at the beginning of your loan. Second mortgages do not supersede your first mortgage.

You will always know what your monthly payment will be if you get a fixed interest rate on your second mortgage. HELOCs, with their variable interest rates, can have unpredictable payments.
You can get the loan you need while keeping the interest rate on your first mortgage.

Cash Out Refinance – You can refinance your first mortgage for a larger amount than its current balance with the equity built up in your home. The difference between the balance and the new loan is yours to use for any purpose.

These loans are great if you can get a lower interest rate on the loan than your current mortgage.
You will only have one monthly payment.

HELOC, Second Mortgage, and Cash Out Refinance Cons

HELOC

Your interest rate will fluctuate month to month. This combined with the changing balance from withdrawals and repayments will make it hard to predict what your monthly payment will be from month to month.
The temptation to use the card or checks for extras can also be difficult. Be sure that you will only use the loan for its intended purpose if you go with a HELOC.
Some HELOCs require balloon payments after a certain amount of time, which means that all of the outstanding balance is due. Make sure that you know how you will pay for the final payment on your HELOC. Second mortgage or cash out refinance might be better for you if you can’t swing one large payment.

Second Mortgage

You pay interest on the balance no matter when you use the money.
The only way to get more money is to refinance.

Cash Out Refinance

Even with a lower interest rate, you may pay more in interest to your lender over time because your loan term starts over once you accept the new loan.
You have to pay points and other fees on the entire loan, which includes not only the extra money you want to take out, but the balance on the old mortgage, accrued interest, and any fees that are wrapped into your loan.

Once you decide between a HELOC, second mortgage, or cash out refinance, be sure that you check out a few lenders and read the fine print on your contract. By protecting yourself and knowing what to expect from your loan, you can have a good borrowing experience overall.

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