| Many people think of a second mortgage as a fixed | | | | period you may be allowed to renew the credit line. If |
| interest, lump sum loan. However, that is only one form | | | | your plan does not allow renewals, you will not be able |
| of a second mortgage. A second mortgage is actually | | | | to borrow additional money once the draw period |
| ANY secondary lien on your home--secured loan with | | | | ends. Interest is paid only on the amount of equity you |
| your home pledged as collateral. Second mortgages | | | | use. |
| are typically categorized as fixed mortgage rate home | | | | A Home Equity Installment Loan (HEL) is a fixed |
| equity installment loans (HELs), also known as home | | | | mortgage rate loan, which means the annual |
| equity loans, and home equity lines of credit (HELOCs) | | | | percentage rate (APR) and monthly payment will stay |
| which are adjustable rate mortgages. | | | | the same for the life of your loan. The APR for a HEL |
| The Federal Reserve states that the home equity line | | | | takes into account the interest rate charged plus points |
| of credit annual percentage rate (APR) is a variable | | | | and other finance charges. Loan terms can be |
| rate loan based solely on a publicly available index | | | | anywhere from 5 to 30 years, but are typically 15 to |
| (such as the prime rate published in the Wall Street | | | | 20 years. Unlike a HELOC, you get a lump sum for |
| Journal or a U.S. Treasury bill rate). The APR does not | | | | which you immediately start paying principal and |
| include points or other finance charges. The monthly | | | | interest. If you decide later that you need additional |
| payment amount will adjust as your loan balance and | | | | funds, mortgage refinancing or getting an additional loan |
| interest rate changes. Loan terms can be anywhere | | | | with additional closing costs are your only options. |
| from 15 to 30 years. | | | | Which type of loan you choose depends on your |
| HELOCs have a draw period, typically occurring in the | | | | financial needs. A HELOC may be best if you have a |
| first 10-15 years, with the remaining term on the loan | | | | recurring need for money (e.g., home improvements or |
| referred to as the repayment period. During the draw | | | | a home repair project that has anticipated additional |
| period, you can draw out money on a revolving basis | | | | expenses). The security of a fixed-rate 2nd mortgage |
| similar to a credit card without applying for a new loan, | | | | will probably provide much-needed relief for a large |
| as long as the amount does not exceed the total | | | | one-time expense (e.g., debt consolidation). |
| amount of the original HELOC. During the repayment | | | | |