Understanding Home Equity Loans
Home equity is the difference between what your house can sell for and what is left on your mortgage. Understanding home equity loans can be confusing for some. For instance, if you can sell your house for $500,000 and you have $300,000 left as a balance on your mortgage, you now have $200,000 of equity in your home. Equity can be used as a means of borrowing money against your home (leveraging) without having to sell it.
The money that you obtain can be used for almost anything you want. Commonly, homeowners borrow to buy a second property, to finance a child’s education, to pay off debts or for renovations. There normally aren’t restrictions on how you decide to use the funds. Nowadays, the two most common ways to borrow against your home equity is a home equity loan or a home equity line of credit.
A home equity loan provides you with a one-time lump sum payment. It has a fixed interest rate and you repay it through monthly payments. This is typically within a specific time frame of 10 to 15 years. Your payments never vary throughout the entire term of the loan. A home equity loan is sometimes known as a second mortgage when the lender requires that a lien be put on the title of the property. Liens insure that the lenders always receive their money first to pay off your outstanding debts on the property.
The interest rate on a home equity loan is typically higher than that of a first mortgage. It is usually much lower than the interest rates on credit cards and other debts so it can be a better choice for debt consolidation. You can also access more money than on a line of credit. Many lenders will offer up to 80% of the appraised value of your home in the form of a lump sum payment. However, lending policies differ, so speak with a mortgage professional if you are contemplating a home equity loan.
Home Equity Line of Credit (HELOC)
A home equity line of credit (HELOC) works much the same as any other line of credit. You submit an application, supply documentation and the lender runs a credit report. If you are approved, the lender grants you a specific amount of credit that you can use when you wish. It has an adjustable interest rate, usually tied to the prime lending rate. Unlike a home equity loan, your interest rate could fluctuate a lot if the prime rate is jumping around. Also, if you do not borrow on the line of credit, you are not charged interest.
These Home Equity Line of Credit (HELOC) loans are like credit cards. You do not have to use the maximum amount of credit that you are granted. If you do withdraw a lump sum amount, payments commence. Your balance outstanding goes down and your equity goes back up. You are required to make at least the minimum payment, just as you would with a credit card.
A qualified mortgage professional is aware of what is happening with lenders and can find a product that suits your needs and your pocketbook and their services come at no cost to you. Like any other form of debt, it is best to talk with a professional before making a major decision and your mortgage broker can help. Lastly, this is our professional take on understanding home equity loans. If you have questions about obtaining a home equity loan or setting up a home equity line of credit (HELOC), please call us today to speak to one of our mortgage professionals.