Home Improvement Advice: Home Equity Credit Lines Versus Fixed Rate Second Mortgages

 Are you thinking about mining the equity for a home improvement loan, but are wondering if you have missed the boat not doing a refinance and cashing out? There are still many home equity loans available that may suit your needs without breaking the bank with payments. "Home-equity loans have been growing at a large clip for years," notes Wells Fargo spokeswoman Mary Berg. "It's definitely slowed, but people are still borrowing. They're finding other products that are more flexible in this rate environment." It’s true that there are many options for consumers these days and home equity loans are available as a credit line with variable interest, as a fixed rate mortgage, and you can even find a second mortgage with interest only payments for a set period.

A home equity line of credit generally has a variable interest rate tied to the prime index, which is published daily in the Wall Street Journal. The rate is dictated by the Federal Reserve. This loan works differently from a standard second mortgage. The HELOC is a revolving line of credit that works like a credit card, but is secured by your home. You are able use the line for as long as the draw period lasts. Although the rates are better than credit cards, there is still a variable interest rate and variable payments. This can be a good loan for home improvements if you plan on paying it off in a short period of time. Some HELOCs have interest-only payments for the first few years as incentive to utilize the product.

If you would rather have a fixed payment to hedge against inflation and the fact that all your bills will continue to increase, a standard second mortgage with a fixed interest rate may work best for you. The payments may be higher than a loan with an interest only payment period, but you can be certain of how much you are paying monthly down the road as well. An adjustable rate mortgage in a market with rising interest rates can be daunting.

Keep in mind with all second mortgages you are borrowing against your house, which means if the payments become too much for you to handle, you will lose your home. If you are smart about utilizing your equity, however, it can be used to your advantage.