Should You Choose a HELOC or Second Mortgage?


If you’re planning for a large purchase, such as a home renovation, new car or college tuition, you might be considering using the equity in your home as a funding source. But how do you decide between a Home Equity Line of Credit (HELOC) or Second Mortgage? In addition to learning about the different terms, payment options and other variables, ask yourself these three important questions:

Fixed rate or variable rate: What’s your preference?
Some people prefer the stability of a fixed rate, which is available through a Second Mortgage, while a HELOC rate is variable. Your comfort level with a variable rate loan may push you toward one option or the other.

How are you planning to use the funds?
Since a HELOC or Second Mortgage can be used for a variety of purposes, it may seem hard to choose between the two. However, start by considering why you need the additional cash. In some cases, you might have very specific plans. For example, you know that you need $8,000 for your daughter’s wedding in June or $6,000 to purchase and install a new furnace.

When you have a specific dollar amount in mind, a Second Mortgage might make the most sense, especially if you aren’t planning to borrow again. If you need access to funds off and on over a longer timeframe and are unsure of the total cost, a HELOC may be the better choice. For example, if you have a home improvement project in the works or plan on payment for tuition over multiple years.

How would you describe your money management skills?
In addition to how you will use the money, it’s important to consider your own personal money management habits. For a simple comparison, think about how you might use a credit card.

Do you have a tendency to over-extend yourself financially when you have access to credit? If having an open-ended line of credit – like a credit card – and it makes it difficult for you to stay within your budget, a Second Mortgage could be the better option. With a Second Mortgage, you have a set payment schedule and repayment amount. This option provides more structure for those money managers who need, or prefer, it.

However, if you manage the outstanding balance on your credit card with discipline – by making regular payments and not carrying a large balance – a HELOC could be a reasonable option for you. With a HELOC, your monthly payment amount is based on your outstanding balance, so it changes as you use the line. A HELOC provides a lot of flexibility. For disciplined money managers, a Home Equity Line of Credit may be the right answer.

Our Personal Banking experts can also help you determine which type of loan is best for your situation. To get started, find your local Merchants Bank branch or apply online now:

Loans are subject to credit approval.