What is a Home Equity Loan?

  • By Admin
  • June 17, 2014
  • Comments Off on What is a Home Equity Loan?

What is Home Equity?

HELOC financed graduationHome Equity is the portion of the house value a homeowner actually owns. It is the value of the house minus any liens and mortgages.

In the past decade, homes in most neighborhoods have seen sizeable appreciations in value. Homeowners who want to capitalize on the equity built in their homes, but do not want to sell their residences, have the option to do a Cash-Out Refinance. But a Cash-Out Refinance may not be the best option, if the interest rate on the new mortgage is higher than the existing loan. Since the new loan amount would definitely be higher, a Cash-Out Refinance with a higher interest rate costs much more in the long run. Moreover, since the financial meltdown of 2008, banks are reluctant to make cash out refinance loans.

In come the Home Equity Loan and Home Equity Line of Credit (HELOC). Home Equity Line and HELOC are not refinances. They are second mortgages that stand behind the current mortgage, if there is one. They do not change or alter the current mortgage in any way. HELoan and HELOC are most often drawn on for home repair or remodeling, to finance a child’s education, to purchase a new car, or pretty much any purpose. HELoan and HELOC are loans secured by the home. It the homeowner defaults on the repayment, the home can be foreclosed upon.

Why Home Equity Loan?

There are several advantages to Home Equity Loan and Home Equity Line of Credit over Cash-Out Refinance:

  • After Cash-Out Refinance, new interest rate may be higher than that of old mortgage
  • High closing costs often associated with Refinance
  • Homeowner withdraws from HELOC when needed and pays interest on only the amount owed

Home Equity Line

A HELOC works very much like a credit card. Funds are borrowed when the homeowner has the need. Interest is accrued and paid only on the amount owed. It often has an adjustable interest rate, and is usually pegged to the Prime Rate, sometimes with a margin. In addition to providing checks to draw on the line, some banks now offer a Visa card for easy access to the equity.

A Home Equity Loan works like a home mortgage. The home owner gets the borrowed amount in one lump sum. HELoan usually has a fixed interest rate and predictable monthly payments throughout the term of the loan.

Qualification of HELoan and HELOC is based mostly on the homeowner’s ability to repay the loan. Underwriting requires the assessment of the homeowner’s credit profile, sufficient income, and adequate assets.

Categories: Uncategorized

Comments are closed.