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Home Equity Line of Credit (HELOC)
Taking out a Home Equity Line of Credit (HELOC) or second mortgage on your home, used to carry some stigma with it - a sign that you were in financial trouble. But today, the ability to borrow money against your property is considered one of the biggest advantages of owning a home. A second mortgage is essentially a loan secured by your home or another piece of property with a first mortgage. The second mortgage allows the homeowner to tap into his or her equity to pay for college tuition, essential home improvements, pay off credit card balances or other pressing financial needs.
Because there is more risk involved with a second mortgage, the lender's conditions are usually more stringent, the term is shorter and the interest rate is higher than for the first mortgage. In the event of default, the holder of the second mortgage is subordinate to the first.
To qualify for a second mortgage, your credit must be in good standing and you must be able to document your income. An appraisal will be required on your home to determine the home's market value.
By definition, a second mortgage is any loan that involves a second lien on the property, but you generally have two options: a home equity loan or a home equity line of credit.
Both options combine your first and second loan, so your loan will be limited to 75 to 80 percent of your home's appraised value. With a home equity loan, you borrow a lump sum of money to be paid back monthly over a set time frame, much like your first mortgage. However, the closing costs (often 2-3 percent of loan amount) are often higher than your first mortgage and the rate - usually fixed - is also higher.
A Home Equity Line of Credit is like a credit card. You can borrow money up to your credit limit, and you only get charged interest on the portion that you borrow. You can pay down the balance, then reuse the credit. Most have a draw term, usually 5 to 10 years, where you can draw money out, then the loan is paid back over a 10 to 15 year period. You may also elect to refinance the Equity Line and get another 5 to 10 years to use the line of credit.
You choose what you want to do with your home equity line of credit:
- Remodel your home
- Take a vacation
- Consolidate bills
- Buy a car, boat or RV
- Finance tuition or other expense
- Use it as an emergency fund
When deciding what type of loan is best for you, it is important to consider how you will use the money and how you intend to pay it off. Do you need money in one lump sum or intermittent over several months or years? Do you want a fixed interest rate so you can repay your loan in precise monthly installments or would you rather have the flexibility to make any size payment above the interest-only minimum? In today's competitive market, there are many options available. MortgageMobile.com will help you find the right mortgage product for your lifestyle and financial needs.
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