What is a HELOC second mortgage?


A HELOC second mortgage is nothing more than a HELOC (home equity line of credit) taken after you already have a first mortgage loan. HELOCs are increasingly being used as first mortgages, which is dangerous since HELOCs are structured as ARMs with the interest rate adjusting daily.

Advantages of a HELOC Second Mortgage

Compared to conventional second mortgages, HELOCs have lower closing costs and more flexible payment options. A HELOC second mortgage will have a draw and repayment period. The draw period requires interest-only payments on the amount used and when it ends, the balance may be due as a balloon payment or amortize for designated number of years.

HELOC costs are lower than second mortgage closing costs and the lender may pay them. Often, HELOCs have very low introductory rates.

A HELOC second mortgage is usually structured as an ARM, although it may be convertible to fixed rate.

HELOC Disadvantages

A HELOC second mortgage has high maximum rate cap and no adjustment cap compared to standard ARMs. HELOCs may change very quickly if the prime rate changes. Also, HELOC APR is not comparable to a standard loan APR - it includes only HELOC interest rate and no closing costs and fees.

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