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Open End Home Equity Line of Credit vs. Lump-Sum 2nd Mortgage

Many homeowners come to a time when they must make a choice between an open-end home equity line of credit and a lump-sum 2nd mortgage. Home equity lines are open-end because they are revolving lines of credit like a credit card. They work like a credit card because, with a home equity line of credit, you only pay interest on the portion that is used. If you only use the home equity line of credit here and there, then this type of financing is a good fit.

Defining Loan Terms: Fixed Rate 2nd loans are considered a closed-end second mortgage. HELOCs are considered an open-end second mortgage.

If you want to get cash out by leveraging home and you need a specific amount of money, then a lump-sum 2nd mortgage makes sense. Like most home loans this 2nd mortgage is an installment loan that offers a lump-sum up front. This means that if you get a $50,000 second mortgage that you will receive the entire lump-sum up-front and begin paying back principal and interest immediately with a fixed monthly payment. Fixed rate 2nd mortgage loans provide a piece of mind for many borrowers that are not comfortable with the variable interest rate that is tied to an open end line of credit. Another benefit is that with a fixed second mortgage rate, is that you are guaranteed a fixed monthly payment that you can factor in for budgeting purposes.

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