Home Equity Loans / Lines

Home Equity Loans

Do you need to tap into your home's equity to pay for a home remodeling project or to pay off a credit card? A home equity loan is a fixed or adjustable rate loan that is secured by the equity in your home. With a home equity loan, you borrow a lump sum of money to be paid back monthly over a set time frame, much like your first mortgage. The terms home equity loan and second mortgage are often used interchangeably.

The process for a home equity loan is similar to your first mortgage. The closing costs (often 2-3 percent of the loan amount) are usually lower and, although the interest rate is higher on a home equity loan, the interest paid is tax deductible. The home equity loan is similar to a HELOC (Home Equity Line Of Credit) except it is a fixed rate loan that does not allow for additional draws and the payments are principal and interest for a fixed period of time.

To qualify for second mortgage, your credit must be in good standing and you must be able to document your income. An appraisal will be required on your home to determine the home's market value.

Home Equity Lines of Credit (HELOC)

Consumer Handbook on Home Equity Lines of Credit

A Home Equity Line of Credit (HELOC) allows you to use the equity built in your home as a form of revolving credit to payoff debts or make major purchases. Download the following consumer handbook for details.

If you need to borrow money to pay off debts or make a major purchase, a home equity line of credit (HELOC) can be useful. A HELOC is a form of revolving credit secured by the equity in your home. This is an open ended loan that can be paid down or charged up for the term of the loan, much like a credit card. The interest rate fluctuates (typically monthly). The rate is usually tied to the PRIME rate and will adjust whenever the PRIME rate adjusts.

With a HELOC, your lender will approve you for a specific amount of credit - the maximum amount you may borrow at any one time under the plan. In determining your credit limit, your income, debts, credit history and other financial obligations will be reviewed. An appraisal will be required on your home to determine the home's market value. Your credit limit will be based on a percentage of your home's appraised value.

For example:

The loan guidelines may allow you to borrow up to 90% of the total value of your home.

If your home is worth $500,000 and you currently owe $350,000 on your first trust loan, then the HELOC limit would be set at $100,000 (350,000 + 100,000= 450,000 which equals 90% of the home's $500,000 value.)

When you take out a HELOC, you pay for many of the same expenses as when you financed your original mortgage, such as a title search, appraisal, attorneys' fees, and points (a percentage of the amount you borrow).

Most HELOCs have a fixed period (5, 10, even 20 years) during which you can borrow money. Typically, you will use special checks or a credit card to draw on your line. You will be required to make a minimum payment each month - usually just the interest that accrued during the draw period. However, the interest you pay is usually tax deductible. At the end of your "draw period," you will be required to pay off the loan, making monthly payments on the principal and interest to pay the loan off in a specified time frame.