Get Started – Home equity lines and loans enable you to borrow against the remaining equity in your real estate. They are also known as second mortgages because they are placed on top of an existing first mortgage. In some cases, they may be the only mortgage of record. There are two varieties of the second mortgage, with the major difference being the way in which funds are made available.
Home Equity Loan
The Home Equity Loan is a lump sum amount which is lent to the borrower at closing. This loan is typically fully amortizing and has many term options to choose from, i.e. 5, 10, 15, 20, 25, or 30 years. It may also have a balloon option; for example, a 30-year amortization with a 15-year term.
These loans have fixed rates, higher than a first mortgage due to their position. Generally, when the term of the loan is longer, the interest rate is higher.
Home Equity Line of Credit – HELOC
The Home Equity Line of Credit (HELOC) is offered as an interest-only loan for the draw period and then has an amortizing segment for the duration. This loan is normally tied to the Prime Rate and is the more popular of the two types of Home Equity loans.
The HELOC functions like a credit card in that you are only charged for the balance owed, and if you pay down the principal, you can access the remaining line by writing a check against it. Usually, this loan is offered with a ten-year interest-only portion and then either a 5, 10, or 15-year repayment period in which there are no draws available and the loan is fully amortizing.
Rates on the HELOC are generally lower than the Home Equity Loan because it floats and is tied to the Prime Rate. As the Prime Rate Changes, so does the interest rate on the HELOC.
Other factors that affect the initially offered rate are the same as the Home Equity Loan, and include combined loan to value ratio, borrower credit score and borrower debt-to-income ratio.