Is a home equity line of credit similar to a second mortgage?

Posted By Freelance On December 7, 2007 @ 9:50 am In Financing a Home, Consumer News and Advice | Comments Disabled

A home equity loan, like a second mortgage, lets you tap up to about 80 percent of the appraised value of your home, minus your current mortgage balance. But because it is set up as a line of credit, you will not be charged interest until you actually make a withdrawal against the loan, although you will be responsible for paying closing costs.

The withdrawals can be made gradually as you begin to pay contractors and suppliers for handling your remodeling project.

The interest rates on these loans are usually variable. Of particular importance: make sure you understand the terms of the loan. If, for example, your loan requires that you pay interest only for the life of the loan, you will have to pay back the full amount borrowed at the end of the loan period or risk losing your home.

What about a second mortgage?

It is a loan against the equity in your home. Financial institutions will generally let you borrow up to 80 percent of the appraised value of your home, minus the balance on your original mortgage.

You may incur all the fees normally associated with a mortgage, including closing costs, title insurance and processing fees.