HELOC vs. 2nd Trust: Which is better?
Both these home loans are available for homeowners. However, it’s possible that you don’t know the advantages that one offers over the other, and knowing the difference could help save you time and money.
Both the Second Trust Loan (also known as a home equity loan) and the Home Equity Line of Credit (or HELOC) use the equity of your property as collateral. The equity of your home is the actual value of the property, minus the balance of any outstanding home loans that you have for it.
For example, say a property has a value of $500,000 and there’s a mortgage for it with a balance of $380,000. The equity on that property would be $120,000.
$500,000 (net value) – $380,000 (existing home loan) = $120,000 (equity).
That equity can be the guarantee for both the HELOC and Second Trust loans, but their workings are different.
The Home Equity Line of Credit
Like its very name indicates, this is a line of credit secured by the equity on your property; these loans have a variable rate -though some lenders may offer them with a fixed rate, too-. The owner of the line of credit has the right, during a certain specified draw period, to make advances from the line of credit. Once the draw period expires, there is an additional repayment term during which s/he must repay the entire balance. HELOCs have a draw period between 5 and 10 years, and an added amortization (repayment) period of 10-20 years. The lender obtains, just like with the Second Trust, a lien on the property, on second position.
The Second Trust
It’s a loan that is very similar to a first mortgage. It’s a lump sum disbursement, and the lender gets guaranteed lien position on the title. The loan can have a fixed or variable rate and, once disbursed, it has a repayment term between 10 and 30 years.
Is one of these loans better than the other?
The advantage of each of these home loans depends of its utility at the time it’s needed.
A Home Equity Line of Credit is great if you know that you’re going to have a series of expenses over time. It allows you to draw only what you need, and the payments are calculated based on what you owe, not the amount of the available line of credit. Not just that, as you pay the line of credit down over time, the cleared-up balance becomes usable again at any time during the draw period.
Alternatively, the second trust is great if you know how much you will need, and you know that you will need it all at once. It has the advantages of a nice rate and a fixed payment during the life of the loan (if the rate is fixed): The repayment period that is often longer than that of a HELOC, which means a lower payment.
If you’re interested in one of these loans, here are the differences between them at OAS FCU:
OAS FCU Second Trust Loan and Home Equity Line of Credit, at a glance
|Second Trust Loan
|Home Equity Line of Credit
|Up to 30 years
|Up to 15 years
|Up to 100% of equity
|Up to 90% of equity
|Both fixed and variable rates available
|Variable, with a special low introductory rate the first 12 months
|Type of disbursement
|One lump-sum disbursement
|Draw period the first 5 years, with revolving credit it (borrow as you pay down)
|Particularly useful for...
|Debt consolidation, large home renovation/upgrade projects, large purchases
|Various ongoing expenses, kids’ tuition, various home improvement projects