Buying a home is one of the biggest decisions an individual can make. While having a home of your own makes you financially responsible for a huge investment, it also offers you a certain level of protection when facing a financial struggle. Individuals hit with an urgent expense sometimes choose to dip into their home’s equity for the financial support they need. This can be done either through a home equity loan or a second mortgage. Depending on your specific situation and financial needs, one type of loan may be more beneficial than the other.
Home equity lines can typically be easily acquired through your lender. Initially, these types of loans can provide a homeowner with a large amount of money at a low-interest rate. A home equity loan may also give homeowners a tax advantage not received through other types of loans. While the general idea of a home equity loan may seem attractive, there are several aspects of these types of loans that homeowner should be aware of.
Home equity loans use your home as collateral. In the event you default on your payment, just like your mortgage, your home may be at risk. If homeowners sell their home, home equity loans must be paid off. They may also include a final balloon payment that may be difficult to pay. For homeowners that experience a sudden, urgent expense, home equity loans may not be the best choice even though they are good for a quick cash injection at an initially low-interest rate. Large final payments and variable interest rates may make them a bit more risky than a second mortgage.
Second mortgage loans may also use your home as collateral, but the interest rate and loan payment associated with these loans are usually fixed. These set amounts may make it easier for homeowners to budget accordingly.
While both home equity and second mortgage loans are a good source of funds for unexpected expenses, knowing the difference between the two and how they may impact your ability to pay them off is important. If a financial struggle has impacted your family to the point where you are considering bankruptcy, speaking to an attorney may help.