If you are homeowner considering using the equity in your home for some purpose, there are several things you need to know before committing to a loan. Here is what you need to know about using home equity.
Equity is the term used to describe the value in a home owned by the homeowner. The difference between the appraised value of your home and the payoff balance of your mortgage is the equity you own in your home. A home equity loan is a loan mortgage lenders grant you that is secured by your home. It is important to remember that even though you own the equity, the mortgage lender is allowing you to borrow against that value and will expect to get their money back.
The home equity loan you take out is secured by your home just like your primary mortgage. If you default on this mortgage your lenders can foreclose on your property even if the payments on your primary mortgage are up to date. It is important to budget accordingly to ensure you do not wind up in financial hot water. Home equity loans come in two flavors: second mortgages and home equity lines of credit. Both types have their pros and cons and allow you to borrow for different needs.
Types of Home Equity Loans: Second Mortgages
The first type of home equity loan to consider is a second mortgage. A second mortgage allows you to borrow a lump sum of your equity at a fixed interest rate. The main advantage of a second mortgage is the payments can be fixed over a long period of time; because this loan comes with a fixed interest rate the payment amount will not change for the duration of the loan.
Home Equity Lines of Credit
A home equity line of credit is the other type of home equity loan. The primary advantage of this type of loan is that it allows you to borrow less money and pay that amount back quickly. This could save you money over a second mortgage loan. The disadvantage of lines of credit is that they come with variable interest rates. If you borrow large amounts using a home equity line of credit your monthly payments will change when the lender adjusts your interest rate; this could cause problems for your cash flow if the payments rise too quickly.
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Louie Latour specializes in showing homeowners how to avoid common mortgage mistakes and predatory lenders. For a free copy of "Mortgage Refinancing - What You Need to Know," which teaches strategies to find the best mortgage and save thousands of dollars in the process, visit Refiadvisor.com.
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