Need Cash From Your Home? Is a HELOC or a Fixed Second Mortgage the Better Fit?

Two ways to borrow against your home

Your equity is the part of your home you own free and clear. It is the home’s value minus what you still owe. Both of these loans let you borrow against it, while your first mortgage stays just as it is.

A fixed second mortgage is often called a home equity loan or a closed-end second. You get one lump sum on closing day. Then you pay it back in the same monthly amount for a set number of years. Most have a fixed cost to borrow, so the payment does not move.

A HELOC is a home equity line of credit. The lender gives you a limit. You take out money when you need it, pay it down, and can take it out again during the draw years. On most HELOCs, the cost to borrow can go up or down over time. That means the payment can change too.

When a fixed second mortgage often fits

• You know the exact amount. A roof bid, a pool quote, or a payoff letter gives you a clear number.
• You need it all at once. You plan to spend the money soon, not a little at a time.
• You like a steady budget. One payment that stays the same each month is easy to plan around.
• You want it paid off on a set date. Each payment chips away at the balance from day one.

When a HELOC often fits

• The cost will come in pieces. A remodel with bills spread over many months is a common case.
• You want a backup fund. Some owners like having money ready for a surprise, even if they never use it.
• You plan to pay it back fast. If you expect a bonus or a home sale soon, a line can be handy for a short time.
• You can handle a payment that moves. Many HELOCs ask only for interest at first. The payment often jumps when the draw years end.

Why keep your first mortgage?

Lots of owners in Middle Tennessee got a low rate on their first loan a few years back. A cash-out refinance would replace that whole loan with a new one at today’s terms. A second loan only puts new terms on the new money. For many people, that keeps the total monthly cost lower. It is not always true, though. A loan officer can lay out both side by side so you can see the real numbers for your home.

What lenders look at

The rules for both loans are a lot alike.

• How much equity you have. Lenders add your first loan and the new loan together. They then compare that total to your home’s value. Each lender sets its own limit on how high the total can go.
• Your income and debts. The new payment gets added to your other monthly bills. Lenders check that your income can cover it all.
• Your credit. A steady record of paying on time helps.
• The home’s value. Some lenders order a full appraisal. Others use a quicker value check.

Costs and fine print to ask about

• Closing costs. Some second loans have fees for the appraisal, title work, and recording. Ask for a full list.
• Yearly or early-close fees. Some HELOCs charge a yearly fee or a fee if you close the line in the first few years.
• The draw and payback years. For a HELOC, ask how long you can draw money and what the payment may look like after that.
• Caps on changes. Ask how high the cost to borrow on a HELOC could go over the life of the line.
• Taxes. Whether the interest can be written off depends on how you use the money. Talk with a tax pro. We do not give tax advice.

You also get a short window to change your mind. For most loans like these on the home you live in, federal law gives you three business days after signing to cancel.

A quick example

Picture an owner in Spring Hill with a low rate on their first loan. They want to redo the kitchen. The contractor gives one firm price, and the work will be paid in two big checks over six weeks. A fixed second mortgage could give them the full amount up front with a steady payment. Now picture a neighbor who plans to fix up the house room by room over two years. A HELOC may suit that neighbor better, since they only borrow as each room gets done.

Tips for agents

• Ask past clients about projects. A quick note about equity can help a client fix up the home they love or plan their next move.
• Watch for second loans at listing time. Both kinds get paid off at closing when the home sells. Ask your sellers early if they have one so the title company can get a payoff.
• Send them to a loan officer before they sign a bid. Knowing how much they can borrow helps them pick the right project size.

Common questions

Not sure which one fits?

Reach out through our contact page and we will connect you with a Heathrow Mortgage loan originator. You can also start an application online.