If you would like to get a fixed amount of cash for some of the equity in your house, a home equity loan is an option worth considering. A home equity loan, sometimes known as a second mortgage, is a loan you take in addition your original mortgage that provides cash for some of the equity you have built up. Home equity loans are usually issued for a fixed amount for a fixed term at a fixed interest rate.
Because they use the equity in your home as collateral, home equity loan rates are often much more favorable overall than other types of credit such as credit cards or student loans. Just remember when considering a home equity line of credit that you are allowing the lender a security interest in your home and you must keep up with the required payments or you can lose your home.
How much can I borrow with a Home Equity Loan?
How much you can borrow on a home equity loan depends on where you live, the current value of your home, the amount you currently owe on your home, and your own personal financial and credit history. Most home equity loans today limit the combined loan-to-value (or LTV – the total of this home equity loan plus the balance of your first mortgage compared to the value of your home) to 80%. Programs, guidelines and interest rates can vary widely from lender to lender and state to state, so thoroughly researching your alternatives will provide you the information you need to make a better decision about a home equity loan.
What’s a HELOC?
If you do not need the cash all at once, you may want to research a home equity line of credit (HELOC.) Whether to go with a home equity loan or HELOC depends on how and when you need the money, and how you plan to pay it back. If you require a set amount of money for a specific purpose, the home equity loan usually has a more predictable payment and lower overall cost of financing for the same amount than a HELOC. Home equity line of credit rates work a little different since you don’t require all the money at once. With a HELOC, you will not incur interest charges on the funds until you actually draw them from the line of credit. Some HELOC payments can go up after a set time period as the payments move from interest-only to fully amortizing.
Home Equity Loan Terms and Fees
When it comes to paying the money back, a home equity loan will usually have a fixed payment over a fixed time, just like your first mortgage. This can be a great way to budget and discipline yourself to get the money paid back on time. Be sure to check the details of your home equity loan for prepayment penalties. Some carry no penalties, some carry penalties if you pay off in the first five years, some may carry penalties for the life of the loan.
With a home equity loan, there will be closing fees that may include appraisal fees, origination fees or points, title fees and stamps and credit reports. In most cases, these fees are less than those of your original home mortgage. The closing fees may be rolled into your loan or paid up front. Be sure to compare the costs if offered the option to roll in rather than pay up front.
In general, interest on a home mortgage is a tax-deductible expense. However, there are specific limits on the deductible interest of a home equity loan that will depend on when you took out the loan, how much you owe, and what you do with the money. To learn if the interest on your home equity loan will be tax deductible, you can consult irs.gov.
As with all major financial decisions, doing the homework and the math will help you find the right choice for your unique situation. There is always a wealth of information online about various types of home equity loans and home refinancing programs. As you proceed through the process be sure to get the clear details, which your lenders are required to provide you. If you take the time understand exactly what you are signing up for and get a clear picture of home equity rates beforehand, you can avoid any unpleasant surprises later.