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  Home Equity Loan

          (also known as a Second Mortgage)

      
       

There are two types of Home Equity Loans:

  • Home Equity Line of Credit ("HELOC")
  • Home Equity Fixed Rate Loan ("HELOAN")

There are two reasons to consider a Home Equity Loan:

  • Purchase a new home
  • Refinance your current home (for whatever reason)

Whether your home equity loan is a HELOC or HELOAN, both types of loans use your home as collateral, and are considered a second mortgage.  If you default on this type of loan, you are at risk of losing your home in the same manner as if you default on your first mortgage. 

It was previously common to see 125% loan-to-value ("LTV") home equity loans, which loaned 25% more than the appraised value of the home.  In today's financial climate, it may be difficult even to borrow more than 90% of the value of your home.  The closer you get to a 90% LTV loan, the higher the interest rate that you should expect to pay.

Also previously, if a borrower had high credit scores, lenders easily  allowed stated income (and possibility without verification of assets) to

 
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100% LTV. Now, most lenders are requiring that ALL borrowers document income, as well as assets -- while limiting the loan to a maximum of 90% of the value of the property.  The lending climate has changed dramatically since June, 2007.

Why consider a home equity loan?

Purchase a new home:

If you are planning to borrow more than 80% of the purchase price of your home, your first mortgage lender is going to require that you either purchase private mortgage insurance ("PMI") or you must acquire a second mortgage.  In today's lending environment, however, a second mortgage (whether a HELOC or HELOAN) combined with a first mortgage is generally limited to 85% of the purchase price.  A second mortgage carried by the seller of the property however, may allow up to a 95% loan-to-purchase price, depending upon the loan amount of the first mortgage. 

Most sellers don't want a financial tie to the property they are selling, so your choices, as the buyer, will be most likely a home equity loan or PMI.  A home equity loan might have a lesser monthly payment than PMI, but over the lifetime of the loan, you may pay MORE for a home equity loan than for PMI.

Refinance your home:

Should you refinance your home?  Visit our web page regarding the many reasons to refinance, or use our Refinance Analysis Calculator to determine if your refinance outcome matches or exceeds your financial expectations.  Or avoid the number-crunching tedium and contact us electronically -- or just call us -- to discuss your particular needs and allow us to provide you with choices tailored to you and your circumstances.

 

What's the difference between a HELOC and a HELOAN?

A HELOC is an adjustable rate mortgage.  It has a 20-30 year term, with an interest-only period of 5, 10 or 15 years.  If there is a balance at the end of the interst-only period, the remainder balance is amortized at a determined interest rate over the remaining term of the loan.  During the interest-only period, the HELOC has many similiarities to a credit card, although there are usually minimum draw amounts specified.

  • Some lenders will issue a credit card (secured by your home).  Other methods of drawing funds are (1) checks; (2) electronic request; or (3) a telephone request.
  • Interest charged is based only on the amount of money borrowed and currently outstanding
  • Balance can be paid down and credit can be re-used (without penalty) during the interest-only period
  • Interest rate is adjustable, usually tied to prime rate.  Keep in mind that the cap rate may be 10% or greater than the initial start rate.
  • Some programs offer a fixed rate loan option feature, allowing you to lock the rate on all or a portion of the outstanding balance.  Note that the rate on the fixed portion of the HELOC are generally greater than with a HELOAN for the same loan amount, although you may continue to use the remainder funds from HELOC at the original HELOC terms.
  • There is usually an annual maintainance fee.

A HELOAN is a fixed rate mortgage, sometimes with a 30-year amortization period, but with a balloon payment due in 10 or 15 years.  A HELOAN is a closed-end mortgage.  If you want more money out of the loan later than was originally received at closing, you will need to do a re-finance in order to access those funds.

Additional Commentary:

  • Pricing on either loan type is based on your credit score, as well as the combined loan-to-value of your first and second mortgage ("CLTV").
  • Many Home Equity loans have early closure fees.
  • Mortgage interest is usually deductible on either type of mortgage, but may be limited, depending upon the loan amount as well as the property type.
  • Loan fees are typically less on a Home Equity Loan than with a first mortgage.  Stand-alone (when not originated simultaneously with a first mortgage) Home Equity Loans have more fees.
  • There may be limitations are on the maximum amount of money requested for a cash out transaction

Since rates are so strongly dictated by CLTV and credit scores and because underwriting guidelines are changing rapidly in today's lending environment, we are unable to quote generic interest rates, although they can range from Prime Rate to 10% or higher.  You will have to contact us electronically or by phone for a personalized rate quote.