Increasing Home Prices Create Home Equity Opportunities
Lets say you you bought or refinanced your house with a low fixed mortgage. Given that rates will be increasing shortly, it is likely that you will want to keep your low interest rate. What if you needed extra cash however? This is where a home equity loan could benefit you.
With the rise in home values, many homeowners are converting their equity loan to cash with HELOCs and HELOANs.
What Is A Home Equity Line of Credit Verse a Home Equity Loan?
A HELOC, or Home Equity Line of Credit, is a line of credit secured against your home that you can draw against. HELOCs, usually have an adjustable interest rate and the money can be used at your disposal . A HELOAN, or Home Equity Loan, is the same thing except it is a 1 time deal, has a fixed interest rate, and the borrower cannot draw against the property. Most of the time, when people discuss this type of program, the terms are used interchanably but must be noted that loans are secured by your property, and failure to make repayment results in your home in foreclosure. The concept is the same as a regular mortgage loan.
The difference between mortgage and equity loan is that the home equity loans are little riskier for lenders, also called “junior liens” or “second mortgages.” In home equity loans, if you end up in foreclosure, the lender will get paid off after the lender that holds the first mortgage.
If the foreclosure sale proceeds don’t bring in enough to cover the first and second mortgage, the lender of the second mortgage loses and does not get paid.
Interest Rates Of Home Equity Loan
Expect higher rates whenever you apply for equity loans because of the additional risk to the lender. HELOC loans have a variable rate of interest, but most of the time, HELOAN payment and rate are fixed.
For borrowers with excellent credit history, fixed home equity interest rates are about 1.5% higher than the 15-year fixed mortgage rate.
Home equity lines of credit (HELOCs) rates widely than first mortgage rates and impacts your credit more. The difference of 80-point in FICO scores can create 6% difference in a home equity rate of interest.
First And Second Mortgage Differences
Besides the rate difference, there are other distinctions too.
Home equity loan range from 5 to 20 years where 15-year tenure is the most common. If loans are for a short period , the lenders are safer when compared to the longer period loans.
Usually, mortgage programs allow the borrower to finance 95, 97 or 100 percent of their home purchase price. Whereas, many equity lenders’ max out homeowner’s loan to 80 to 90 percent.
HELOC fees for escrow and title insurance are usually lower than first mortgages and close much faster than first mortgages. A borrower may get his or her money in a couple of weeks.
At closing, the HELOAN delivers a lump sum of cash . The fixed payment and fixed rate makes HELOAN easier for borrowers to include in their budget.
HELOAN is a smart loan when the borrower needs all the money at closing . For example, if you need to pay a contractor for a major home renovation or opt to consolidate your credit card accounts into a single loan, HELOAN is a great choice.
HELOC or home equity line of credit is more flexible, but makes budgeting harder for borrowers. It offers a drawing period, in which a borrower can use funds, up to the credit limit, and when needed.
After the lapse of the drawing period, the borrower can no longer tap the HELOC and must repay it. Some HELOC (aka “convertible” HELOCs) might allow borrowers to fix their interest rate when they enter the repayment period.
HELOCs are great for home renovations that occur over a longer period of time, and are ideal for serving as a source of emergency cash.
Get Live Home Equity Mortgage Rates
Home equity rates can vary between lenders and that’s why you need to shop for the best deal. For more details and information, call United Financial Counselors. Let us help you!