Are you considering a home equity loan? Here are some important things to keep in mind: Home Equity Loans are sometimes referred to as "second mortgages" With Home Equity loans, your house is used as collateral. The equity you have in your house is the difference between the market value of your house and how much you owe on your original mortgage. For instance, if you owe $200,000 on your first mortgage and your house is appraised at $300,000 current market value, the lender may allow you to borrow up to $100,000 or 100% of your equity. Many lenders protect themselves by allowing you to borrow only up to 80% of your equity.
The advantages of Home Equity Loans are:
- Allow homeowners to borrow against the equity in their home
- Fixed payment terms over the life of the loan
- May provide tax advantages to the owner.
The disadvantages of Home Equity Loans are:
- Interest rates are typically higher than first mortgages
- Borrowers may not "pay down" and borrow additional money
- Homeowners equity is "tied up" and not available if needed
Home Equity Line of Credit
Home Equity Lines of Credit- As with Home Equity Loans (see above), you are borrowing against the equity in your home. However this loan is a flexible one as you draw funds only as needed, and only pay interest on monies borrowed.