A home equity loan, also known as a second mortgage or equity loan, allows homeowners to use the equity in their home as collateral to borrow money. The maximum amount of the loan will be based on how much equity there is in the home, and the difference between the appraised value of the home and how much the owner owes on the mortgage.
For Instance, if you own a home that is valued at $400,000 and you still owe $340,000 on your mortgage, you would have $60,000 in home equity. Your lender will use this amount along with your credit and income to decide how much you will qualify for. Most borrowers can receive up to 85% of their home equity.
When you take out a home equity loan, you will receive the full amount in one lump sum. This is the main reason some homeowners will get a home equity loan instead of a home equity line of credit (HELOC), which works in the same fashion as a credit card with a maximum draw.
Home equity loans will usually come in 15 year terms with fully fixed interest rates. With HELOCs, you will most likely get a variable rate. Home equity loans can be used to pay for home renovations, college tuition, medical expenses, and more. Interest paid on a home equity loan is tax deductive.
Remember to be wary of using a home equity loan, since these types of mortgages use the home as collateral and are under the influence of an existing mortgage. If you default or do not meet the terms of your mortgage, the lender may foreclose on the home. The home equity lender also reserves the right to protect their investment. If you stop paying your first mortgage, the second lender can forfeit any payments you make to the first lender and foreclose on the home.
If you are in need of a lot of money for something that can’t wait such as structural repairs to your home, medical expenses or college tuition, an equity mortgage loan also known as a second mortgage, may be a good solution as long as you can repay it. Rates on home equity loans are typically very low, allowing homeowners to use equity loans to consolidate debt. Since the interest you pay is tax deductible, you can recoup some of your money.
If you are not in need of a large sum of money immediately or you would prefer to have access to your home equity for emergency purposes, you may be better suited for a home equity line of credit. With a HELOC, you only repay money that you borrow and you will always have that line of credit available to you when you need it. In this way, it works much like a credit card.