Second Mortgage or Credit Line: Which One to Pick?

A second mortgage and a credit line are two kinds of lending products. Borrowers can take advantage of both when they want to expand their financial resources. These financial tools operate differently and have different uses, so you need to know the distinctions before deciding which type of loan is right for you.

Read on to learn more about the differences between second mortgages and credit lines, as well as which one is best for your financial needs. 

What is a Second Mortgage?

A second mortgage is a type of mortgage that allows the borrower to borrow against their current real estate assets. When taking out a second mortgage, you are giving a lender the right to take ownership of a portion of your property in exchange for a loan on which you then make payments. This kind of mortgage allows you to borrow extra money for home renovations, debt consolidation, or any other purpose. One thing to keep in mind when taking out a second mortgage is that it has high closing costs (typically between 6% and 10%), which means that it won’t be a good fit for everyone.

What is a Credit Line?

A credit line is a type of unsecured loan that provides the borrower with a revolving amount of credit for a specified period of time. Credit lines are generally offered by banks, credit unions, loan apps, or other financial institutions and give the borrower access to credit up to a specific limit. Depending on an individual’s credit history, the lender decides an upper limit of credit they are willing to give. The borrower can access funds until they exhaust that upper credit limit. 

There are many reasons why borrowers may want to take out a credit line. If you own a business that needs to expand, you may want to take out a credit line to cover the cost of renovations. You may also find yourself in a financially dire situation, such as being unable to make payments on a large credit line that was taken out years ago. Borrowers can use personal credit lines to fund any expense without having to follow any limitations set by the lender. 

Should You Take Out A Second Mortgage Or Credit Line?

There are a few questions you need to ask yourself before you decide between a second mortgage or a personal credit line. 

1. How long are you planning to keep the property? 

If you intend on staying in your home for the long term, a second mortgage may be a good option for you, as it will allow you to increase your equity and provide you with a monthly payment. However, if you are planning on moving in a short period of time, a line of credit may be a better fit for you.

2. What is your credit score? 

A credit score is a number used by lenders to determine whether you are worthy of credit. Your credit score is calculated based on your payment history, including the amount of debt you currently owe, your payment history, the amount of debt you owe, and how long you have had that debt. If you have a low credit score, you may be denied a second mortgage or have to pay higher interest rates. In this case, a personal credit line from an instant loan app might be your best option since they have lenient eligibility requirements

3. What are your overall debt-to-income ratios?

Your overall debt-to-income ratio is calculated by dividing your total monthly debt by your total monthly income. The higher your overall debt-to-income ratio, the more careful you should be when taking on new debt. If you take a second mortgage and are unable to repay your debt, you may face serious consequences, such as losing your home. If your debt-to-income ratio is high, a credit line is a better option as you can access small amounts of credit over a long period of time. This makes it easier to pay it back. 

CASHe is a leading online loan app offering instant loans, BNPL, and personal credit lines.  Download the app today!