Home Equity Loan Rates

Home Equity Loan Rates

Home Equity and Second Mortgages are different. The difference between a home’s fair market value and the outstanding balance of all liens on the property is Home Equity. A Second Mortgage, on the other hand, is a form of a home equity loan, hence financially they are synonymous.

Nomenclature would beg to differ in that a second mortgage refers NOT to the debt itself, but to the legal lien instrument instead.

Second Mortgage:

A fixed sum of money is repaid on a set schedule, like your initial mortgage. With 15 to 30 year loans having a fixed rate of interest, rate of interest and eligible points is based on your credit history, the price of the home, and the current interest rate.

Home Equity:

A Home Equity Line of Credit (HELOC) is not only similar to a credit card, but it may also include a credit card for purchases. Interest and the amount you can borrow are based on your creditworthiness.

Calculation:

For HELOC, the appraised value of your home will be taken into consideration, and lenders will start calculating at 75 percent of that value. From that figure, the outstanding balance owed on the mortgage is subtracted.

E.g.
Appraised value of home: $400,000
At 75%: $280,000

Original Loan: $200,000
Paid Up: $80,000

Amount Deducted: $180,000
HELOC Available: $100,000*

*Depends on credit history.

Your calculations will be based on your current financial needs. That need will reflect on the type of loan you would use. The fixed-rate second mortgage is practical if you are looking at single one-off expenses such as renovating a portion of the house or paying for a wedding. Tuition payments and other recurring needs will require you to look at HELOC.

Another critical thing to keep in mind is your own spending habits. Your needs may not always be justified. The important thing is to know exactly which of your requirements trigger a need for extra money. Every time you borrow money, your credit history comes into play.

And the more your credit history lags in sustaining your creditworthiness, the worst it will get in the long run. As soon as you have talked your requirements over with your family, or anyone close that needs to have this information, you should immediately discuss the details with your lender. Lines of credit involve monthly repayments, and as such you will need to review the terms more surgically.

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