When talking about home equity loans, there are two basic types. In this article, we want to break these two options down for better understanding.
Home Equity Line of Credit (HELOC)
The Home Equity Line of Credit is a type of equity loan in which you would be able to borrow the difference between the value of your property and the amount still owed to the mortgage company. In this case, using the equity in the home you might be able to qualify for a decent amount of credit, which would be available to use whenever and however you choose. In most cases, the interest on this type of equity loan would be determined by the prime rate in addition to a margin.
To determine the actual line of credit, the lender would consider your ability to repay the loan by looking at a number of factors such as debt to income ratio, other financial obligations, and your credit history. Now, if you were to take out a home equity line as revolving credit, the home would be the collateral. Therefore, funds would be accessible through an account on which you would write checks, known as “mini-loans” that go against the equity in the home. With this, when you repay a mini-loan plus the interest, you can use that same equity time and time again.
The majority of costs associated with setting up a home equity line of credit would be similar to what you pay when buying a home. For instance, these fees would include appraisal fee, application fee, closing costs, attorney fees, mortgage preparation fees, title insurance, title search, annual maintenance fees, and so on. Because the amount of fees can vary, it would be worth your while to shop around for the best bargain.
Fixed Rate Second Mortgage
The second option you have for an equity loan is a regular fixed rate mortgage. In this case, the money borrowed would be the entire amount paid to you all at once. With this, the payments are amortized over a 15 to 20 year period. Therefore, you would need to make a set payment amount each month just as you would with your first mortgage until the amount of the loan is paid in full.
The decision of taking out a line of credit or refinancing your home depends on your personal situation. Most often, the interest rate on refinancing is less than the interest ate on a second mortgage. However, on a line of credit, risks for the lender are much higher, meaning the lender would charge you a higher rate. Again, you would need to determine which option is best for you. If you need assistance, you can work with a qualified lender who will guide you through the process.