Real Estate Loans
Home Equity Loan vs Home Equity Line of Credit (HELOC)
Second mortgages come in two basic forms: home equity loans and home equity lines of credit, or HELOC. They typically offer higher interest rates than primary mortgages because the lender assumes greater risk – in the event of foreclosure, the primary mortgage will be repaid before any seconds.
However, because the loan is still collateralized, interest rates for second mortgages are usually much lower than typical unsecured debt, like charge cards, credit cards, and consolidation loans.
The other major advantage of second mortgages is that at least some of the interest is, for borrowers who itemize, tax deductible. To receive the full tax benefit, the total debt on your home, including the home equity loan, cannot exceed the market value of the home. Check with your tax advisor for details and eligibility.
With a home equity loan, you will receive the cash in a lump sum when you close the loan. The repayment term is usually a fixed period, typically from five to 20 years. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.
You can borrow up to the amount of equity you have in your home – the estimated value of the house minus the amount you still owe. You are not required to borrow the full amount, but can instead borrow only what you need.
Interest rates are usually fixed rather than variable. You might consider a home equity loan rather than a home equity line of credit if you need a set amount for a specific purpose, such as an addition to your home, or to pay off your entire unsecured debt.
A home equity line is a form of revolving credit. A specific amount of credit is set by taking a percentage of the appraised value of the home and subtracting the balance owed on the existing mortgage. Income, debts, other financial obligations, and credit history are also factors in determining the credit line.
Once approved, you will be able to borrow up to that limit, in restricted increments. Interest is usually variable rather than fixed. However, the repayment term is usually fixed and when the term ends, you may be faced with a balloon payment – the unpaid portion of your loan.
The advantage of a home equity line of credit is that you can take out relatively small sums periodically, and interest will only be charged when you deduct the money.
The amount of equity you currently have in your home will determine the HELOC limit or Home Equity Loan value. Consult with one of our Home Equity specialists to determine your estimated credit limit or loan value amount.