Friday, 15 September 2017
Home equity loans, sometimes known as second mortgages, let homeowners borrow against the equity they have built up in their homes.
These loans can be used for various purposes, but common uses include home improvement projects, debt consolidation, wedding expenses, and financial emergencies.
There are two basic types of home equity loans: 1) home equity loans and 2) home equity lines of credit (HELOC). Both types require you to use your home as collateral, meaning you could potentially lose your home if you are unable to pay back the loan.
As mentioned previously, when you get a home equity loan, the equity you have in your home is used as collateral. The entire loan amount is given to you in a lump sum and you make fixed monthly payments, just like your regular mortgage. Home equity loans usually have a fixed interest rate and a term of five to 30 years.
A home equity line of credit (HELOC) is revolving credit line. It is also secured by the equity in your home, but instead of receiving a lump sum of cash, you have the ability to make draws on your revolving line of credit account, usually by check, credit card, or by visiting a branch. You can then borrow and pay back money as you need it, up to the approved credit limit.
HELOCs usually have a variable interest rate, so your monthly payment will depend on current interest rates and the amount of the credit line being used. Lenders sometimes require you to take an initial advance when you set up the line of credit, withdraw a minimum amount when you take a draw, and keep a minimum amount outstanding. When the draw period ends, the outstanding amount must be paid off over a repayment period, usually five to 15 years.
Terms vary by lender, but you can often borrow up to 80 or even 90 percent of your home's current equity (defined as the current market value of your home minus the principal amount owed on your first mortgage, plus any other liens). A current appraisal is usually required to determine the amount of equity you have in your home, and in turn, how much you can borrow.
Getting a home equity loan or line is much like getting a first mortgage; you need to be approved based on the amount of equity in your home and your credit-worthiness. Most home equity loans require a good to excellent credit history and a reasonable amount of equity built up in the home.
A standard home equity loan is often used for a large one-time expense, like debt consolidation or home improvements, since it is paid out in one lump sum. A HELOC is frequently used for home improvements, a wedding, medical expenses, or the purchase of a car or boat. Since it is a revolving line of credit, as you pay down any amount you borrow, the funds are available for future uses for a predetermined draw period (typically 10 years).
There can be many benefits to using the equity in your home to borrow money, some of which may include:
Closing fees on a home equity loan or line are similar to standard mortgage fees. You can expect to pay the following:
Any home equity loans or lines of credit must be paid off in full when you sell the house.
Don't borrow more than you can reasonably pay back. Protect your pocketbook by exploring all of the costs involved in a home equity loan or line of credit. Gathering all the facts ahead of time will help you make an informed decision and ensure you get the right loan at the lowest cost.
The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates.
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