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2nd Home Equity Loan Alternatives


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TERMINOLOGY

A 2nd home equity loan can provide cash for important needs - such as home improvement or college expenses - but also comes with risks. Consider alternatives to a 2nd home equity loan based on your specific needs.

Home Equity Loans Explained

If the current market value of your home is greater than what you owe on it, that difference is called equity. A home equity loan is when you use the equity as collateral and borrow against it. If there is equity remaining, in other words, if the market value of your home has risen or you did not pledge all your equity, you can take a 2nd home equity loan.

Home equity loans typically are larger dollar amounts and designated for a specific purpose, such as home improvement or repair or big expenses like college or a wedding.

A 2nd home equity loan likely will have a higher interest rate than your mortgage or 1st home equity loan because the additional borrowing by you makes you a greater risk to the lender.

Cash-Out Refinancing

Particularly in times of declining home values, lenders are more reluctant to offer a 1st or 2nd home equity loan. If you still have equity, they are more likely to consider a cash-out refinancing. This means taking out a new mortgage on the current value of your home, paying off your old mortgage, which must be less than the new mortgage, and pocketing the difference.

There are significant fees to refinance which can either be rolled into your mortgage, increasing your debt, or paid from the cash-out, reducing your cash in hand.

HELOC

A home equity line of credit, or HELOC, looks much like a 1st or 2nd home equity loan but there is a key difference that can make it attractive. With a home equity line of credit, you are still pledging your collateral, but you only take out as much as you need - up to the maximum - so your additional debt load might be less.

Other Borrowing

If a 2nd home equity loan is not feasible or desirable for you, consider other kinds of borrowing such as:

  • Individual Loans - Many people navigate tight financial times with loans from family members.
  • Credit Cards - You can easily get in over your head with a credit card, but if debt reduction is your goal, and you can get a no-fee transfer of existing credit debt to a better interest rate, it can be a wise alternative.
  • High Interest Loans - Many short-term alternatives such as payday loans, personal loans and even car title loans can help you bridge a short term gap with less hassle than a 2nd home equity loan. But be aware, these types of loans are high-risk to the lender and interest rates are high. Balances can snowball if unpaid. These are a last resort.