You’re a homeowner in high debt and a second mortgage is looking like a promising option. The question becomes which kind of second mortgage makes the most sense for you.

In this video, I break down the two most common types of second mortgages that are used to consolidate debt: a home equity line of credit and a home equity loan.

TRANSCRIPT:

If you’re facing six figures in consumer debt but don’t want to refinance your house and lose out on your amazingly low interest rate, then a second mortgage might be a great option. See my video on that topic to hear the pros and cons of second mortgages. If you decide to go for it, then the next question becomes, what kind of second mortgage should I get? And that’s what I’m addressing in this video.

There are two kinds of second mortgages that are generally used for paying off debt. The first is a home equity line of credit, also known as a HELOC. The  second type of second is a home equity loan. Stay tuned to the end to hear which one I’m recommending most often these days.

So let’s start with HELOC’s. I think this is the one that is more well known. It works a lot like a credit card. You get approved for an amount, say $150K and then you get to use up to that amount. You can use a little and pay it back or you can use some one month, use more the month after that, not use it for a couple of months, pay some back, draw some more. You can pay it all back and then use it all over again. It’s a revolving balance during the draw period, which is the number of years that you can spend the money that you’re approved for. Oftentimes the draw period is 10 years and the payback period is 20 years so this is a 30 year loan.

A home equity loan can also be a 30 year loan but here they give you all the money in a lump sum and then you pay it back monthly like a regular mortgage. Because HELOCs are like a credit card, they also come with a variable interest rates. Home equity loans, also called closed-end second mortgages, come with a fixed interest rate. How high are these rates? Well of course they vary with what’s happening with interest rates, but generally, they’re going to be higher rates than 1st mortgages but lower than personal loans and definitely lower than credit cards.

Based on what I’m seeing right now you can lower the interest on your debt by half or even two thirds. Something else to keep in mind about HELOC’s is that after the draw period is over, you have to pay it back and possibly the entire balance at once, in a lump sum. I see HELOC’s making more sense in the scenario when someone needs access to a lot of money but they’re not sure how much. Maybe they have renovation plans and aren’t sure what they want to do or how much it will end up being. So the flexibility of a HELOC, which allows you to borrow only what you need, and pay interest on only the amount you borrow, is appealing.

On the other hand, if you’re using the funds to pay off debt that you’ve already accumulated, and you know exactly how much your total balance is, a home equity loan is more straightforward because they give you the total amount that you qualify for, you pay off the credit cards, personal loans, car loans, etc. and then you pay the second loan back monthly.

The process of obtaining a second mortgage is virtually the same for both types. I shop around for the best lender for your situation, we apply for the loan, you get an appraisal done, we figure out the loan amount, and submit all the supporting documents for the loan. Then you sign loan docs with a notary, just like for a first mortgage. The process looks similar but it tends to go faster than a loan for a home purchase. It usually takes a few weeks to get them done.

When it comes to paying off six figures in debt, I more often recommend home equity loans because they’re more straightforward and less risky.

Whichever type of second loan you use to consolidate debt, I highly recommend that you get financial coaching to help you build the habits and relationship with money you need to avoid sliding back into debt, as unfortunately, happens a lot when people get out of debt.

So if you’re a California homeowner looking for a second mortgage or you’re a person anywhere in the world looking for a financial coach, please reach out. I’ll see you in the next video.