2nd Mortgages versus HELOCs

Often borrowers seek a 2nd mortgage when they are in need of extra cash. While this is certainly not the only valid reason for a 2nd mortgage, it is one of the most popular. It allows borrowers to take advantage of the equity they have built in their home and use it for their financial benefit in other areas.

One of the most popular types of 2nd mortgages for this purpose is the home equity line of credit, commonly shortened to HELOC. These mortgages operate as a revolving line of credit, allowing borrowers to take out money as it is needed, rather than taking out the entire loan amount in one lump sum.

HELOCs have been around since the 1980s, and are different from traditional 2nd mortgages in several important ways. First of all, HELOCs are not always 2nd mortgages. It is rare for a HELOC to be used to purchase a house, but they are sometimes used to pay off a first mortgage. When this is the case, HELOCs become first mortgages themselves.

However, an overwhelming number of HELOCs are 2nd mortgages, used to obtain cash for a variety of reasons. The obvious difference between HELOCs and other 2nd mortgages is the revolving nature of the HELOC loan.

Another important difference is that HELOCs are always adjustable rate mortgages. HELOCs can be refinanced to a fixed-rate mortgage, and often are after the borrower has made his last withdrawal from the HELOC.

In short, when taking a loan for a fixed sum, borrowers can choose a 2nd mortgage with either a fixed or adjustable rate. When choosing a 2nd mortgage for a revolving line of credit, borrowers are stuck with an adjustable rate. These loans are called home equity lines of credit, or HELOCs.