Home Equity Options

Second Mortgages are often called “Home Equity Loans”. If you want to avoid re-doing your first mortgage (maybe you have a really good interest rate on it now, for example) but you still want to access your equity, you may want to consider a 2nd mortgage like this.

There are two basic types of Home Equity Loans. You can either do a defined loan with set terms (HEL) or you can do a flexible type of loan known as a Line of Credit (HELOC). The type you choose has a lot to do with your feelings about risk and what you plan on using the loan for. A quick look at your options with help you decide which is best for you.

Difference Between HEL’s & HELOC’s

Home Equity Loans (HEL):

The loan amount is set, the interest rate is typically a fixed rate (but some lenders offer adjustable rate HEL’s). The repayment term is set. So for example, your HEL might look like this: $50,000 loan @ 9.0% fixed-rate interest with repayment over 15 years. At closing, you’d get your full loan amount (less any closing costs unless you pay for these yourself outside of the loan – which would be unusual) and you’d begin making a regular monthly payment to pay back the loan. Because this example is a fixed rate loan, your monthly payment wouldn’t change over the life of the loan and at the end of 15 years, you’d have it all paid back.

Home Equity Lines of Credit (HELOC):

HELOC’s typically come with variable interest rates – although there are some that offer fixed rate options. On a line of credit, your payment each month will be based on how much money you have borrowed against your “line”. For example, if you set up a $50,000 line, but you only borrow $30,000 of it, your payment will be based on that $30,000 balance – much like a credit card monthly payment is set. As you pay down the balance, your monthly payment will go down. But with a HELOC, you are given the option to borrow more of your available line at any time. You don’t have to ask anyone permission to access it.

You are usually given a checkbook or a debit-type card and you can spend your line any time you want. When you do, your payments will go up based on how much you borrow.

You can even pay off the entire balance of the HELOC, and as long as you don’t close the account (or the lender closes it for you – which can happen), you can re-access the line again – still without asking anyone’s permission to do so.

Unlike a HEL, when you open a HELOC, you often have the option of how much money you want to begin with – known as your initial “draw”. Some HELOC’s require that you start with a minimum draw amount and others may let you start out with no initial draw at all – meaning you’re going to need that money sometime soon, you just don’t want to take it out now and start paying interest on it before you need to.

What’s The Costs?

Many HEL’s and HELOC’s have similar types of closing costs to first mortgages, but usually, because the loan sizes aren’t as large, they are not nearly as high. You’ll typically need an appraisal done to determine the value of the home – but sometimes lenders waive this requirement for you, depending on the mortgage markets and your risk profile. You also will usually need some sort of title work and various other mortgage-type fees. Some of these fees go to the lender, some go to pay for the third-party services on your behalf.

No Cost Options?

There are many “no-cost” options for 2nd mortgages, depending on the lender and your loan criteria. Rates and terms can vary widely, so it doesn’t hurt to look around a little bit before choosing a lender. Often times, your own bank can be a good source for a low-cost option, so check those signs hanging in the lobby for information.

Currently in the mortgage markets, many lenders have restricted their 2nd mortgage programs or eliminated them all together. This is likely a temporary situation as lenders like having their loans secured by real estate – at least in “normal” real estate markets. But as it is, you may need to check around a little more to find good options, and you’ll likely need to have a strong credit profile and a good equity position in your home. (If your 1st mortgage is already as high as the value of your home – you don’t have any available equity to access. But if you owe less than your home is worth, you can probably find a HEL or HELOC option if you need it.)