A home equity loan is commonly referred to as a second mortgage or equity loan. It is a type of secondary home loan based on the equity of a property in addition to a primary mortgage. As the property is collateral for the loan, rates are typically low in comparison to other forms of loans. On the other hand, there are closing costs involved with home equity loans.
Home equity loan amounts are typically based on the difference between a property’s current market value based on an appraisal and the remainder of the original mortgage balance. To qualify, most borrowers require 15-20% of the equity in the property. Usually, that works out to a minimum of $30,000 or $40,000. Additionally, there are some credit score requirements to qualify.
Home equity loans are somewhat similar to home equity lines of credit or HELOCs but there are some key differences. Home equity loans are given as a lump sum as opposed to a revolving line of credit which can be accessed when needed. Home equity loans typically have a fixed rate while credit from a HELOC usually charges interest at a variable rate.
The repayment time frame of the loan or credit is also different between home equity loans and HELOCs. With home equity loans, the average is somewhere between 5 to 15 years. HELOCs are a bit different, with a 5 – 10 year draw period where a borrower can pull credit followed by a 10 to 20-year repayment time frame.
Home equity loans can offer borrowers certain perks but have certain drawbacks as well. One should consult with a certified expert to see whether a loan or line of credit is a better option for them.