Home Equity Loan - A fixed rate second mortgage

Sam · Last edited by Sam on Sun Jul 15, 2007 10:30 pm

A home equity loan is a mortgage taken by keeping the home equity as the collateral. It is a kind of second mortgage taken against the same property on which there is already a lien placed by a first mortgage.

For example, suppose you have obtained a first mortgage worth $100,000 on your property. You have paid $50,000 in last 5 years. Your home value has also increased to $200,000 in these 5 years. So your home equity is $1,50,000 ($200,000 - $50,000). Now if you take a home loan worth $1,50,000 keeping the home equity as security for the debt, then such a loan is called a home equity loan.

Features:

A home equity loan is offered as a single lump sum amount.
Such loans usually have fixed rates and equal monthly payments over a long period of time, that is, 15 to 20 years. Generally the repayment period is shorter than that of primary mortgage.
The interest rates are higher than those of primary mortgages and lower than rates offered by credit cards and auto loans.
The interest paid on home equity loan is tax-deductible, that is, it lowers your taxable income and thus gives you the chance to save by paying less tax. The interest can be deducted for a home equity debt of $100,000.

Benefits:

A home equity loan helps you to go for home renovation and also buy a second home.
The loan amount can be used for expenses on education, medical treatment etc.
A second mortgage can assist in paying off unsecured debts like credit card dues, car loans etc. It also helps to consolidate debts that are to be paid off at high rates of interest.

Disadvantages:

Home equity loans are often used to pay off credit card debts. But this may tempt an individual to take further cash from the credit card balances, thereby increasing his unsecured debt and reducing his equity by a large extent.
If a borrower files bankruptcy chapter 7, he can get rid off unsecured debt like credit card debt. But if he had taken a home equity loan to consolidate such debt then he will have to pay his credit card dues. This is because he had actually secured the credit card dues with his property. Otherwise he may lose his property through foreclosure on failure of repaying the unsecured loan.

Related Articles

Should you go for a Second Mortgage loan?

Related Forum Discussion

Home Equity Loan Vs. Home Equity Line

Guest 0.10 Dollars($)

There is less than 20% equity in my home but I am still looking to borrow against it. As I need to consolidate some bills which have brought down my FICO score to 525. I have had two late payments on my first mortgage 2 months ago. I need a 100% home equity loan but no lender is willing to finance at this credit score. Anyone here interested or can tell me which company would offer bad credit home equity loan?

sara · Posted: Tue May 01, 2007 3:04 am Post subject: RE: 100% home equity loan

Hi Ralph,

Welcome to the forums.

There are subprime lenders who can offer you a loan worth 125 % of the home value. At a low FICO score, you are likely to get a higher interest rate on your loan. Or else, if you can find a co-borrower or a cosigner with a high credit score, you can user the person's credit to qualify for such a loan.

Take Care

ckalvesmaki · Posted: Tue May 01, 2007 4:00 pm Post subject:

Hi Ralph.......Let me clarify a few things. With your scores chances are there aren't going to be any options for a second mortgage the cutoff for most lender is 580 for a second especially with the way the market is today. Your best and really only bet would be to try and get a cash out refi to 90% of the appraised value of the home. It would be a subprime loan and chances are rates would be in the 11% range.

Samantha

But Ckalvesmaki, is it a favorable choice to deal with subprime lenders currently? I have heard that the entire subprime market has suffered through a crisis and several lenders had to stop their business as they could cope up with the rising delinquencies and foreclosures.

Our community has discussed on this issue at http://www.mortgagefit.com/predeal/brokers-subprimemarket.html . You too can share your views in that thread.

0.10 Dollars($)

Just because the lender funded your loan goes out of business doean't mean the terms of your loan changes......right now guidelines are much tighter and the original OP should probably work on improving scores a little be fore attempting a refi......however there are still funding sources out there albeit with tighter guidelines and higher rates.

Samantha · Posted: Wed May 02, 2007 4:39 am Post subject:

Hi Guest,

Is it Ckalvesmaki? Did you have any login problems as such? Just asking because you've posted as guest. Smile

Guest 0.10 Dollars($)

why someone will refinance the mortgage

miller_st · Joined: 17 Jan 2007 Posts: 917 168.82 Dollars($)

You can look to refinance your existing mortgage if current rates are lower than what you have on your present mortgage. This can result in reducing your monthly payments.

In my opinion you should go through the other points mentioned in this page to know if refinancing would be a wise financial move.

Miller

Guest 0.10 Dollars($)

I have my home located at Alabama .It's appraised for $375,000 and paid in full. We would like to shift to North carolina and we've searched for a new home, but the sale is pending. I was just planning to use the equity in my Alabama home and pay for the new home. It's worth $240,000. Then I would sell off my Alabama home and therefore loan would be paid off. Is that the right way to do this or is there any other option? My payments on the equity loan would be around $2000 and I wouldn't like to make more than a payment or two as I could sell off that home quickly. If there's any problem, should I be able to delay the payments for 60 days or so on the equity loan? What's the maximum limit to delay the loan? I wouldn't like to make a lump sum payment and then sell off the Alabama home. I would do that asap..any advice?

jenkin7 · Joined: 04 Jun 2007 Posts: 858 127.02 Dollars($)

Hello Jonathan,

Have you got an estimate of how much your home at Alabama would sell for?

I think that is essential to know for whatever plans you have.

If there is any delay in making payments towards the home equity loan, that will show on your credit. If there's a 60 days delay you may get a demand or breach letter from your lender to show that the terms of the mortgage has been violated. You will get 30 days more to resolve the situation and make regular payments.

If there is any further delay, your house may go into foreclosure. That could be a risk for you.

So I think, it will be better if you can either sell off the house first and pay for the new home with the sale proceeds or else at least fix up the sale after a particular period of time so that you are aware when you may pay off the home equity loan.

larry · Joined: 27 Jun 2007 Posts: 2473 327.54 Dollars($)

Hi Jonathan,

Welcome to the forum and Merry Christmas Smile

I do not agree with Jenkin here. You can surely take that home equity loan to buy the house in North Carolina. And after selling the house at Alabama you can pay the loan off. The home equity loan is tailor cut maid for such reasons.

You just need to be a bit careful that you do not make any late payments.

Feel free to ask if you have any further questions.

Best of luck,
Larry

lisascherzer · Joined: 04 Jan 2008 Posts: 575 66.11 Dollars($)

Hi Jonathan,

Yes, the way you have this structured would work out fine. You may want to look at a bridge loan or line of credit to delay payments for up to 6 months. You can find out more about these options at "http://www.mortgagelenders.us.com/bridge_loan.htm"

[Link deactivated as per forum rules. Thanks.]

Guest 0.10 Dollars($)

I have equity worth $35000 in my home. my son wants to take an equity loan but he's not on title. Is this possible in any way? His score is 570

Niicss · Joined: 03 Oct 2005 Posts: 612 85.52 Dollars($)

Welcome Tabitha Brown,

Your son's credit score is not too high. By the way you can use quitclaim deed to add him on the deed and then he can take the HELOC. Talk to your lender and check out if it is possible or not. By the way keep it in mind HELOC loans are generally higher in interest rate.

Let me know if you have any more queries.

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