What is a Home Equity Loan?

Not even a year ago, you could refinance your entire mortgage to get cash out of your home’s equity while taking advantage of record low rates. The market is changing and rates are rising, but you still have options to make your home work for you. Home equity loans, also known as second mortgages, are a potential tool that can help you access some of your home’s equity, keep the rate on your existent mortgage, and still achieve your financial goals.

What is a home equity loan?

A home equity loan is simply a mortgage (or lien) that is secured by a property that already has an existing loan. Think of it as borrowing against the equity in your home to support your current needs or goals.

Rates on home equity loans are typically higher than primary mortgage rates. However, they are an appealing alternative to credit card debt or an auto loan because they are typically offered at lower rates than other forms of consumer debt and do not restrict how the money is used.

A home equity loan allows you to put your equity to work for you, as it allows you to take a lump-sum payment using the equity you’ve built. You pay the loan back with installment payments and interest, just like your primary mortgage. Lenders will only allow you to access a certain amount of your home equity, which is in your best interest as you do not want to use the advantage of home equity to over-leverage your finances.

The amount of money you could obtain through a home equity loan depends on the amount of equity you have. Equity is the difference between your remaining loan balance and your property’s value. For example, if your home is valued at $200,000 and your remaining loan balance is $160,000, you have $40,000 worth of home equity. Typically, when your home value increases, your home equity increases, as many homeowners have seen in recent years.

What are the pros and cons of a home equity loan?

Pros:

• They are a way to pay off higher interest rate debt like credit cards
• They are an appealing alternative to re-financing in a rising interest rate market
• They do not have fund usage restrictions – you can apply money towards higher education, a wedding, home renovations, etc.

Cons:

• They have higher interest rates than primary mortgages
• They become an added expense to your budget

As with all large financial decisions, they should not be taken lightly and you should consult a subject matter expert. We are here to help in any way we can. For more information on home equity loans and the application process, contact us at (866) 228-1339. Our highly experienced team will partner with you to find a mortgage solution that works best for you.