HELOC or fixed second?

Two tools, one piece of equity

Both a HELOC and a fixed-rate second mortgage sit behind your existing first mortgage and borrow against the equity above it. Both leave your first mortgage exactly as it is, which is why they are the right tools for an owner whose first mortgage carries a rate they will not see again.

The difference is shape. A HELOC is a revolving line: you draw what you need, pay interest only on what you have drawn, and can repay and redraw during the draw period. Its rate is usually variable. A fixed second is a lump sum: you receive the full amount at closing and repay it over a set term at a rate that never changes.

When a HELOC fits

A HELOC suits spending that arrives in phases or may not arrive at all. A renovation done room by room, tuition paid each semester, a reserve against the unexpected. Because you pay interest only on the balance, an unused line costs little. The trade-off is the variable rate: understand the index, the margin, the caps and what the payment becomes when the draw period ends and the balance converts to full repayment.

When a fixed second fits

A fixed second suits a known amount and a desire for certainty. A single large expense with a firm budget, or consolidating several debts into one payment with a payoff date. You pay interest on the full amount from closing, so borrow what you need rather than the maximum. Shorter terms carry higher payments and less total interest.

Before you consolidate debt into your home

Using either tool to pay off credit cards or personal loans can lower your monthly cost substantially. It also changes the nature of the debt: unsecured debt that cannot take your home becomes a lien that can. Answer these questions honestly before you decide.

• What is the total cost of my current debts over the time it would take to pay them off, compared with the total cost of the new loan over its term?
• If the new payment is lower because the term is longer, am I comfortable paying more in total interest for the lower monthly cost?
• Will the spending that built the balances continue once the cards are cleared?
• Is my income stable enough to carry a secured payment through a bad year?

Or neither: the cash-out refinance

If your first mortgage rate is higher than today's rates, replacing it with a single larger loan may improve both the first mortgage and the equity borrowing at once. Troy prices all three structures against your real numbers and tells you which one the math favors.