People tap into their home equity for a variety of reasons, with the two most common reasons being consolidating debts and making home improvements. The question is whether you should take out a home
equity loan (second mortgage) or a home equity line of credit (HELOC). Each has its benefits and drawbacks.
Some of the advantages of both home equity loans and home equity lines include lower interest rates and potential tax savings, and both offer interest only payment options in case you are short on cash. With a home equity loan, you get a lump sum at the beginning of the loan that you start paying back immediately. A HELOC gives you a revolving, variable interest rate credit line that you don’t start paying back until you start using the line of credit.
According to the Federal Reserve, home equity lines of credit annual percentage rates (APRs) are based solely on a publicly available index (such as the prime rate published in the Wall Street Journal or a U.S. Treasury bill rate). However, it is an adjustable rate mortgage (ARM) loan. With rising interest rates, they’ve gotten a lot more expensive, doubling to 8 percent in the past three years.
The Federal Reserve states that APR for traditional second mortgage loan takes into account the interest rate charged plus points and other finance charges. However, because you are paying a fixed home equity rate instead of a variable rate, your payments will be the same throughout the life of the loan, which makes financial planning because the payments won’t fluctuate with interest rate changes.
Which loan you choose depends on your individual financial circumstances. A HELOC can be useful for people who need fluctuating amounts of money to pay recurring expenses or a short-term financial backup plan, but may not be the best choice for someone interested in long-term debt consolidation or someone who needs a set amount for a specific purpose, such as a home addition.
Maria Ny is an experienced free-lance writer. She writes articles covering a broad range of subjects ranging from Bankruptcy Reform, Credit Repair to mortgage refinancing. Check out her informative articles online at Nationwide Home Equity Loans.
To learn more and get accurate rates quotes 2nd mortgages and home equity loans from loan professionals online please visit the loan resource center at Second Mortgage Loans or check out Home Equity Lines.
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Property Equity Explained
Equity in our home is simply the value of the property minus the total of the mortgage or mortgages outstanding that are secured against its value. When we first purchase the property the equity value will be fairly minimal unless we have had the good fortune to have been able to put down a fairly large deposit. As time goes by the amount of the mortgage will reduce as a result of the monthly repayments and hopefully, the value of the property will rise in line with market forces and inflation. By taking out a 2nd mortgage home equity loan we can release some of this equity.
What would we use a 2nd Mortgage Home Equity Loan for?
The 2nd mortgage home equity loan can be used for a variety of purposes. Buying, maintaining and refurbishing our property create a severe dent in our family budgets and this budget is most often held together by increasing short term debt e.g. credit cards. By using a 2nd mortgage home equity loan to repay these debts we can reduce our monthly expenditure (repayment of the 2nd mortgage will be over a longer period of time) and provide a good excess of income over expenditure to ease a tight family budget. Also, the interest rate on the 2nd mortgage, whilst being more expensive than our principle mortgage, will be far cheaper than the credit card debt and is also tax deductible.
College or continuing education costs for our children are not cheap and whilst we should have probably budgeted for this many years ago, the practicalities of life are rarely that easy. A 2nd mortgage home equity loan will enable you to cover these commitments and spread the cost over a period of time to enable them to be affordable.
Home refurbishment or extensions can be financed through a 2nd mortgage home equity loan and this will not only provide more comfortable living accommodation but it will add increased value to your property.
You may possibly be thinking of buying an additional property on an investment basis. The 2nd mortgage home equity loan can be used to cover the cost of the new property or as a vehicle to raise the down payment required.
You may be planning a dream vacation for a special anniversary that is coming up. Whilst this may be viewed as a somewhat frivolous one off expense and not provide added value in terms of an education, reducing interest rates, increasing property value etc., you may feel that given the hard work undertaken to get to the position you are in today, it may well be worthwhile using equity in your property for this purpose.
Whatever the reason you are considering a 2nd mortgage home equity loan, they are an easy and flexible product to take advantage of the value built up in your home.
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