What is a Home Equity Loan?
A home equity loan — also called a second mortgage, term loan or equity loan — is when a mortgage lender lets a home owner borrow money against the equity in his or her home.
A home equity loan or second mortgage is paid every month on top of the mortgage you already pay, hence the name “second mortgage.”
A home equity loan or second mortgage can be a source of money to fund your major financial goals, such as paying for medical bills or college education , and can prevent building up credit card debt with high interest rates. With second mortgage, you are putting up your home as collateral for the loan, so if you default on this second mortgage, the bank can take your home. And this type of loan will reduce the equity you have in your home. So when you sell your home, you’ll have to pay off both your first and second mortgages with your sale proceeds.
Make sure you’re able to pay a second mortgage on top of the mortgage you’re already paying. Plan carefully and interact with your financial adviser to see if a second mortgage makes financial sense.
Home equity loans or second mortgages are different than a home equity line of credit (also called a HELOC). With a home equity line of credit, you receive a line of credit secured by your house, and you can use it as you need it, similar to a credit card. With a home equity line of credit, you won’t receive a lump-sum payment like you would with a home equity loan.
How Home Equity Loans Work?
The amount of money you can get with a home equity loan is partially based on how much equity you have in your home. Equity is simply the difference between the value of your home and how much you owe on the mortgage.
The lender would use the equity number — in addition to your credit score and income — to determine how much of a loan you will get. Your lender will need to pull your credit report and verify your income to determine the interest rate you’ll pay for your second mortgage.
Typically homeowners borrow up to roughly 85 percent of the equity in their home. The longer you pay down the mortgage and the more your home appreciates in value, the more equity you build up in the home and the larger a home equity loan you may qualify for.
If you get a home equity loan, you will receive the entire amount of the loan all at once, as opposed to a home equity line of credit, which works similar to a credit card, where you take just what you need when you need it, and then pay it off in monthly installments. Often, you have to pay off a home equity loan or second mortgage within about 15 years, though the terms vary. The interest rate on the loan is typically fixed.
Similar to your first mortgage, second mortgages will require closing costs, which can cost about 3 -6 % of the amount of the loan. So be sure to shop around for different offers from lenders, as the cost of a second mortgage can vary from lender to lender.
What Can a Home Equity Loan Be Used For?
As a homeowner, you can use home equity loans or second mortgages for almost anything you want. Since the money comes as a lump sum (unlike a home equity line of credit), many homeowners use them for large, one-time expenses, such as:
Home repairs, upgrades, or large remodel projects
Paying off high-interest credit card debt
Paying for kids’ college tuition
Interest rates on home equity loans are much lower than rates on credit cards, so this can make financial sense as an alternative to using a credit card if you’re careful.
What Fees Are Required?
They have fees similar to what you paid for your original mortgage, which may include:
Appraisal fees
Early pay-off fee
Title fees
Originator fees
Closing fees
Different lenders charge different amounts for fees, and each lender may offer you a different interest rate.
Who needs a Home Equity Loan?
If you need a lump sum of money for something important (such as a home repair, not a vacation or something fleeting) and are sure you can easily repay a home equity loan or second mortgage, it’s worth considering. The rates on a home equity loan tend to be significantly lower than rates on credit cards, so a second mortgage can be a more economical option than paying for what you need with plastic. And sometimes the interest paid on home equity loans or second mortgages is tax deductible, so this may be an added financial bonus (talk to your tax advisers, as this varies person to person).
Just remember, you will get all this money in one lump sum, and you can lose your home if you don’t repay the loan. So make sure that it makes financial sense for you, rather than an option such as a home equity line of credit, where you can take out the money little by little.
Related Searches
company insurance, homeowners insurance quote, car ins quotes online,landlord insurance, health insurance quotes, whole life insurance rates,life insurance quotes, small business insurance, international health insurance ,senior life insurance,business insurance quote, private medical insurance,international medical insurance,medical insurance quotes,guaranteed life insurance,life insurance no medical exam,whole life insurance quotes,business insurance,public liability insurance,private health insurance,compare life insurance,family life insurance,mortgage life insurance,home insurance,self employed health insurance,cheap life insurance,business liability insurance,life insurance,contractors insurance,life insurance comparison,small business health insurancelife assurance,critical illness insurance,small business liability insurance,professional indemnity insurance,professional liability insurance,joint life insurance,5level term life insurance,life insurance quotes online,cheap business insurance,commercial property insurance,compare life insurance quotes,online life insurance,life insurance cover,commercial business insurance,business health insurance,company insurance quote,decreasing term life insurance,debt consolidation,secured loans,secured loan,secured loans for bad credit,personal injury settlements,personal injury settlement agreement template