Due to the many similarities in these loan products, this document provides two sections of full-scope detailed information about Home Equity Loans and a second section for Second Mortgages. All the information is compiled in this one document so that consumers can easily see the similarities/differences between the two loan types.
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Home Equity Loans
Home Equity Loans, also called or known as “Second Mortgage” loans, are loans that homeowners can obtain by leveraging the built-up equity in their home. In fact, a consumer’s home may likely be a unnoticed source of wealth they may not even be aware of. A home’s equity is the difference between what is owed and what the property is worth. This type of loan allows a consumer to borrow money based on that amount. Additionally, the amount of equity a consumer currently has is not based on the sale price of their home, but it is based on what the house is worth. The amount a consumer can borrow against their equity varies from one lender to another and is determined by the loan the consumer takes out. For instance, if a consumer takes out a new mortgage, they might borrow more than their equity value. Should a consumer take out a second mortgage or home equity line of credit (HELOC), they can generally borrow up to 75% of their equity. There are many Home Equity Loans that come as Fixed-Rate products and have varying terms anywhere from five to fifteen years.
The qualifying process for a Home Equity Loan is quite similar to that of a first mortgage loan. The chosen lender will make a determination of one’s credit limit by estimating the consumer’s ability to pay back the loan. There are a few factors lenders will also take into consideration such as the consumer’s income, other debts or financial responsibilities. Lenders will look at items such as amounts owed on vehicles, credit card debt, spousal support/child support and any court-ordered payment obligations. There are some lenders who charge points. One point is the equivalent to 1% of the amount of the credit and the points are then paid when the loan closes – they are not added into the interest rate.
Home Equity Loans are an extremely sensible solution for unexpected and expensive cost outlays. Examples of unexpected yet costly items are things such as emergency medical bills or important & necessary home improvements. These examples are sufficient, good reasons to obtain a Home Equity Loan if the consumer has the means to pay it back. On the downside, if a consumer has poor/bad credit issues or spending problems and need cash to pay off their debt, a Home Equity Loan is not a good solution. In fact, unless the consumer changes their spending habits, a Home Equity Loan could push them further into debt. For example, these type of loans can be an excellent source to pay off other higher interest debt such as automobile loans or credit cards. The annual percentage rate (APR) on Home Equity Loans is generally much lower than most other consumer debt. Consumers should BEWARE their home is collateral for the loan; therefore, if the consumer defaults on payments, they could lose their home.
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About Home Equity Loans
As a consumer shops for their Home Equity Loan, it is vitally important to make it a point to count all the associated costs before deciding on a lender. The annual percentage rate (APR) does not include costs such as closing and other costs/fees like filing fees, title search fees, attorney fees, insurance and taxes.
There are also a great deal of ways a consumer could borrow against their home equity with all the various programs/products now available, such as:
• Cash Out Refinance Loans – take out a new mortgage for a higher loan amount and keep the difference.
• Refinance Loans – refinance the same amount but with a new interest rate or terms.
• 125 Home Equity Loans – one could borrow more than the present value of their home.
• Second Mortgage Loans – obtain a second mortgage while retaining the existing loan.
Many consumers are interested in knowing how to obtain a Home Improvement loan and/or investigate their options. A Home Improvement loan provides funding for necessary home improvements. These loans typically cover improvements such as additions, repairs, energy-related improvements, as well as remodeling. Items NOT usually covered are “luxury items” such as fireplaces, patios, swimming pools, decks, storage units, or landscaping. Home Improvement loans are usually repaid on a Fixed-Rate loan.
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About Home Improvement Loans
Consumers may have some questions not covered so far and some of those will be addressed in this section. For instance:
Why Would A Consumer Want a Home Improvement Loan?
There are benefits these loans offer such as: 1) Home Improvement loans are UNSECURED, meaning there will not be a lien placed on the property; 2) These loans usually provide fast Approval time which will assist a consumer in getting the funds and beginning their improvements.
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Limits to Home Improvement Loans
Home Improvement loans are limited to $7,500 with the longest term being 120 months.
Types of Properties a Consumer an Obtain a Home Improvement Loan For
Home Improvement loans are offered for an owner-occupied residence. Additionally, no more than 15% of the residence may be used for business purposes.
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Utilizing Home Equity
A consumer’s home equity may be a great avenue to finance a Home Improvement project. The equity that a consumer has in their home/property is the difference between what is owed and what the property is actually worth. A Home Equity loan will provide a consumer a way to borrow based on that amount. Another thing consumers should be aware of is that the amount of current equity in their home is NOT based on what they originally paid for the home BUT on what the home is actually worth. Consumers should note that the amount they could borrow against their equity will vary between lenders as well as being determined by the type of loan desired. Should one take out a Second Mortgage or a Home Equity Line of Credit (HELOC), they can typically borrow up to 75% of their home’s equity.
Special Programs for Those Living in Rural Areas
The Department of Agriculture’s Rural Housing Service is a means of funding for programs such as home renovation and repair for rural consumers. Rural consumers should investigate the “Individual and Family Opportunities” section at www.rurdev.usda.gov/rhs/common/indiv_intro.htm for all the complete, up-to-date details.
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