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Sept 28 2022

What is a HELOC and a HELoan?

HELOC = Home Equity Line of Credit

HELoan = Home Equity Loan

If you’ve never used a Line of Credit before, it works similar to a credit card in that you have a certain amount available to spend at any given time, and once you extract the money, you have to pay the amount borrowed back within the agreed upon terms. However, unlike a loan, once the borrowed amount is paid off, the line amount is still available to draw from again. Both a Home Equity Line of Credit and Home Equity Loan are based off of the equity found within your home.

A 2nd Position Mortgage

HELOCs and HELoans take the 2nd lien position on a house. This means that in case of default that leads to foreclosure, your primary mortgage will be paid back before a HELOC or a HELoan. Because of this, 2nd position liens usually cost more. For example, a primary mortgage may cost 6-7% and a second position lien may cost 7-9%.

When to use a HELOC/HELoan

Since a HELOC is a tool for cashing out on a home’s equity, it’s a great tool for consolidating debt or making a down payment on a rental home. Now if your interest rate is higher than current interest rates, a normal cashout or rate/term refinance is better because the new interest rate will take the place of your current rate. However, if your current mortgage has an interest rate lower than current rates, a second position loan is great because it allows you to keep the better interest rate while taking out the higher rate on the home equity only. The idea is that the secondary home equity loan will be a smaller amount and therefore accrue less interest even at a higher interest rate.

A HELOC has an adjustable interest rate but remains available to use once again after it is paid off, where as a HELoan has a fixed interest rate and once it has been paid off, the loan is closed.

Benefits of using a HELOC

HELOCS have been used for building new homes, buying investment properties, consolidating debt, completing landscape or remodel projects, etc. They are especially helpful in markets such as Colorado Springs where market shifting has occurred. Second mortgages are a Juicy Solution to several different scenarios and my team at Freedom Home Loans is so thorough, I would love to connect you with them to help out with any questions. He website also has a lot of good information so make sure that you take a look around the blog posts and the resources tabs for more helpful tips.


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