If you are considering a home equity loan there are definite advantages to taking out a second mortgage over a home equity line of credit. The advantages and disadvantages of home equity loans depend on your individual circumstances. Here is what you need to know to make an informed decision regarding your home equity loan.
Rising Interest Rates
Rising interest rates are one of the disadvantages of a home equity loan. The Federal Reserve has made a habit of raising short term interest rates to try and stem inflation. The problem with these increases is that mortgage interest rates rise with them. If you have a home equity loan with a variable interest rate you could see significant increases in your monthly payment amount because of these increases. Second mortgages come with fixed interest rates; your monthly payment amount will remain fixed and is not susceptible to interest rate hikes by the government.
Avoid Overspending
A second mortgage loan is paid in one lump sum. Home equity loans allow you to use a debit card or write checks against your equity. This ease of access to your equity might tempt you to overspend and spend money you would not otherwise spend. Taking out a second mortgage will allow you to take out a specific amount for a specific purpose and plan repayment over a period of time.
Fixed Repayment Amounts
Taking out a second mortgage will allow you to plan repayment of the loan. You will be able to choose a term length that allows a payment suitable for your budget. Because this loan comes with a fixed interest rate you can count on the payment amount remaining the same for the duration of the loan. To learn more about your home equity options, register for our free mortgage guidebook: “Mortgage Refinancing– What You Need to Know.”
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
