A second mortgage is another loan taken against a property that is already mortgaged. Many people consider using their home equity to finance large financial needs, but mortgage industry jargon has confused the meaning of certain terms – including second mortgage home equity loan and home equity line of credit (HELOC). A second loan, or mortgage, against your house will either be a home equity loan, which is a lump-sum loan with a fixed term and rate, or a HELOC, which features variable rates and continuing access to funds.
A loan to purchase a home is usually the first mortgage lien recorded on a property; subsequent loans depend on the amount of owners’ equity in the home and generally require a new appraisal. Homeowners may use the money from these second mortgages – available as a lump sum home equity loan or as a home equity line of credit – for any purpose. Deciding which loan is right for you depends on the loan's purpose and your personal spending habits.
A home equity loan is usually a fixed-rate loan distributed in one lump sum, with terms that range from 5 to 30 years. You pay it back in fixed monthly installments. This might be a good loan if you anticipate a large one-time expense such as a wedding, the purchase of a second home, or debt consolidation. A fixed rate and predictable monthly payment can help you budget as you work toward your financial goals.
If you need extra money intermittently, a variable-rate home equity line of credit (HELOC) might be your best choice. Once the lender approves you for a maximum line amount, you can access the available funds as you need them. Use your Home Equity Line of Credit Visa Access Card anywhere Visa is accepted, write a check, visit a branch or ATM, or log in to Online or Mobile Banking and transfer money to your U.S. Bank savings or checking account. You may have ongoing access to funds for 10 years, called the draw period, following the date you open your line of credit. After the draw period you'll have a repayment period of 20 years.
Monthly minimum payments are variable and based on the amount of the line balance and the variable interest rate. As you pay the money back, the funds are available again on your HELOC. This provides you with a renewable source of funding during the 10-year draw period. This is a good option if you anticipate the need to make periodic payments for tuition or remodeling.
Although a home equity line of credit provides ongoing access to available funds, which may be tempting for some people, there are some critical things to consider.
Home equity loans and lines of credit are a good choice for many people. The mortgage interest may be deductible, and these second mortgages allow you to use the equity in your home to pay for major expenses. Contact a banker or come into one of our many U.S. Bank locations for more information so they can work to understand your needs and provide options.