Understanding Home Equity Loans: Overview of home equity borrowing options
Home equity loans allow homeowners to access the available equity in their home by taking out a “second loan” on their home. Home equity is basically the difference between the current fair market value of the home and what is owed on the mortgage. If you’re shopping for a home equity loan, it’s important to understand the difference between a fixed rate second mortgage, often called home equity loan, and home equity line of credit, also referred to as a HELOC. While both are a form of equity borrowing, each loan works very differently.
Home Equity Borrowing: Fixed Rate Second Mortgage vs. Home Equity Line of Credit Line of Credit
Two basic ways to borrow against one’s home equity are a home equity line of credit (“HELOC”), or a fixed rate second mortgage. Both are a second lien on the property, and the loan amount is based on the available equity (or a portion of the available equity) in the home. But each loan has distinct differences.
Fixed Rate Second Mortgage vs. Home Equity Line of Credit
Compare the different features of fixed rate second mortgages and HELOCs.
| Fixed Rate Second Mortgage (Also called home equity loan) |
Home Equity Lines of Credit (HELOCs) |
|
| What is it | A second lien loan on the property, allows borrowing against the available equity in the home | Revolving line of credit allows borrowing against the available home equity |
| Type of interest rate |
Fixed rate Payments and interest stay the same during the term of the loan |
Adjustable rate Payments change based on the interest rate |
| Disbursement money | Borrowers receive the entire loan amount all at once |
-Borrow money as you need it and pay interest only on the amount you use during the draw period -Interest-only periods are usually 5 or 10 years, 25 year loan term |
| Key Benenfits |
-Typically offers a lower fixed interest rate than most other types of personal credit (such as credit cards and personal loans) -Interest payments are usually tax-deductible* |
-Interest rates are usually lower than credit cards and other types of personal loans -Interest payments are usually tax-deductible* |
Home Equity Loans: Rates & Closing Costs
When comparing home equity loans, it’s important to understand how interest rates are calculated and the type of closing costs involved for each type of loan. Once you’ve decide on the type of loan you need – a fixed rate second mortgage or a home equity line of credit – you can start comparing the rates from the various lenders.
| Home Equity Loan (Second Mortgages) |
Home Equity Loan (Second Mortgages) |
|
| Interest Rate | -Fixed rate-Does not change during the term of the loan | -Variable rate-Interest rates can increase based on changes to the prime rate |
| Annual Percentage Rate (APR) | APR based on interest rate and fees | APR based on interest rate and fees (see below) |
| Closing Costs Fees | Typically feature same types of start-up fees and closing costs as a first mortgage | Have very low start-up fees but can include maintenance fees, transaction charges, etc. |
Shopping for a home equity loan?
If you’re thinking about tapping into your equity, call the home equity experts at Countrywide Home Loans, a division of Countrywide Bank, FSB. Our experts can answer your questions about Countrywide’s home equity loan options. Call us today at 1-866-436-0620for a FREE, no obligation consultation.
