Home Equity Loans and Lines of Credit
A Second Mortgage May be the Answer to Your Cash Needs
Don't Refinance Your Mortgage
A home equity line of credit may be the answer to taking cash from your home without refinancing. Don't refinance your low interest rate mortgage just to take equity out of your house. With mortgage interest rates being much higher today, refinancing could increase your mortgage payment significantly. Instead, use a home equity line of credit and keep your low rate first mortgage.
Home Equity Line of Credit
A home equity line of credit (HELOC) is a revolving form of
credit secured by your home. You can borrow as little or as
much as you need, up to your approved credit line, and you pay
interest only on the amount that you borrow. You can take
advantage of flexible repayment terms, and you can use the
credit again as you pay down the balance. However, be aware that
the interest rates on home equity loans are not fixed and float
with prime rate. Thus, your rates and payment may to up or down
during the course of the loan.
HELOCs are similar to
credit cards in that they offer revolving lines of credit that
you can access when needed. The difference with a HELOC is that
your house is used as collateral to secure the credit line, and
the amount you’re approved for is based on the equity you have
in your home. HELOCs are available from many banks and
financial institutions. The payment schedule and payment amount depend
on the type of HELOC you select.
Interest Rates on Home Equity Loans
Interest rates on home equity loans are typically a few percentage points above rates for a first mortgage loan. But, the rate is signifcantly lower than credit card rates that range from 18% to 29%. If you are using your home equity loan to pay off credit cards be sure you do not run up new credit card debt. Use your monthy savings from no credit card debt to pay cash for your needs or to add to your savings.
Fixed Rate Second Mortgage
Another type of home equity loan is sometimes called a home improvement loan. This type of loan usually comes with a fixed rate, fixed amount, and fixed period of time, usually 10 - 20 years. If you are doing a major home improvement project you can get a fixed rate second mortgage that will also reflect the appraised value of the house with improvements completed. Expect to pay a higher rate of interest for a second mortgage, than for a first mortgage. However, the upfront cost are considerably less.
If you are using your second mortgage for home improvement, the lender may make periodic disbursements to the contractor rather than giving you the entire loan proceeds at once. This is similar to a construction loan and the lender wants to be assured the funds are being spent on the improvement and not elsewhere.
Risk of a Second Mortgage
A lender will grant a home equity loan based on the value of your house, less the amount of the first mortgage. Whether you borrow in the form of a line of credit or a fixed rate loan, if you default on a home equity loan, you risk losing your home. Therefore, it's essential to make sure you can afford the monthly payments before taking out a home equity loan.