Home Equity Mortgage Loan
A Primer on Home Equity Loans
Home equity loans occur when a borrower uses the existing equity in their home to get a second mortgage. Home equity loans are extremely common because they are easy to obtain and carry relatively low interest rates. The most common uses for a home equity mortgage loan include home improvements and additions, car or other large asset purchases, college tuition and large medical bills.
A home equity loan is an additional lien (in addition to the 1st mortgage that most homeowners carry) against the borrower's house. They are almost always a second position lien or second trust deed (although it is possible to have a home equity loan in the 1st or 3rd position.) There are two basic types of home equity loans; closed end and open end.
These types of loans should not be confused with California refinance mortgage loans.
Closed End Home Equity Loan
A closed end home equity loan is a fixed loan amount that a borrower receives in a single check upon the loan closing that must be paid back in full by the end of the loan period. It is a more restrictive type of loan that operates in almost the exact same way as a standard mortgage loan. The amount of the loan will depend of the borrower’s credit history and the amount of equity available in the home. For a borrower with a good credit history, the lender will often allow the borrower to take a loan on the full amount of equity (100% of the home’s appraised value – minus any existing liens). Many closed end equity loans are paid off over 15 years, although shorter terms are available that may carry a balloon payment that kicks in at the end of the term.
Open End Home Equity Loan
These loans are more commonly referred to as home equity lines of credit or HELOC loans. The biggest difference (and major advantage) to this type of loan is that, once approved, a borrower has full discretion over when and how often the can borrow from this open line of credit. The downside is that HELOCs are usually adjustable, meaning they rise or fall depending on the prime rate. In times of low interest rates, a home equity line of credit is a great option. However, during times of high interest rates a HELOC can become burdensome and even dangerous for a homeowner if they are unable to make the minimum payment. Typically a home equity line of credit will carry a higher interest rate than a fixed rate home equity loan. It is often possible to borrow up to 100% of the equity in a home for 30 years. Interest only HELOCs are available, as well as principal and interest payment programs.
One more note of caution for homeowners seeking a home equity line of credit. If you take out a home equity line of credit out on your home for 100% of the value and the market drops significantly, you can effectively owe the bank more than the value of your home. This becomes even more problematic if you have an adjustable mortgage rate that is tied to rising interest rates. The result is monthly payments are increasing, while the value of your home is decreasing and your financial obligation to the bank exceeds the original loan amount. Always speak with a mortgage professional to make sure that a home equity line of credit is right for you.
California Home Equity Loans
California home equity loans are quite popular with the continued high home prices in California. Low interest home equity loans provide home owners with equity to make improvements to their most valuable asset. Home equity loans and HELOCs are popular as well in Florida, Texas, Colorado and Oregon.
