Home Equity Loan: Frequently Asked Questions
Home equity loans are a potential savings option for homeowners who want to consolidate debt and/or turn some of their bad credit into good credit. The possible tax deductions on home equity loans make them potentially useful for debt consolidation, since other consumer and personal loans generally have no tax deductions and have higher interest rates. A home equity loan can also be used to improve a home and certain tax advantages may apply.
According to current US Census home equity statistics, approximately 7.2 million Americans took out home equity loans last year. However, not all loans are suitable for everyone. It is important to decide which type of mortgage loan is best for you. To make sure you’re making a sound financial decision before you sign on the dotted line, read on for answers to frequently asked questions (FAQs) about home equity loans.
Frequently Asked Questions: Are Home Equity Loans (HELs) and Home Equity Lines of Credit (HELOCs) the same thing?
A: No. Although both loans are second mortgages, a HEL and a HELOC have some important differences. With a HEL, you receive a lump sum of money, while a HELOC works more like a line of credit.
The interest rate on these loans also works differently. Home equity loans typically have a fixed interest rate, but according to Bankrate “almost always come with fees and closing costs, which many lenders typically don’t charge for lines of credit.” While home equity lines of credit may be free of some of these expensive upfront fees, keep in mind that they’re also variable-rate loans, which means the interest rate can change over time, based on the rate you pay. of preferential interest established by the Federal Reserve.
When choosing between these types of loans, ask yourself if getting your loan all at once or having access to a line of credit works better for you.
Frequently Asked Questions: What is a loan-to-value ratio?
A: The loan-to-value ratio is the difference between the amount of your current mortgage and the recent appraised value of your home. This ratio will be calculated in the loan terms of your second mortgage.
Frequently Asked Questions: Is home refinancing a better option than a HEL or HELOC?
A: That depends. If you decide to refinance your current mortgage, you may be able to get a lower interest rate, which means lower payments and the possibility of a cash-out refinance.
Getting an interest-only refinance is also a possibility. However, while interest only lowers your payments, it can also reduce the equity in your home, and, says CFA for bankrate Don Taylor, “it only makes sense for people who don’t plan to be in the mortgage or home for a while.” “. long time.”
If you’re happy with the interest rate on your current mortgage, it makes more sense to consider a HEL or HELOC, especially since it’s possible to refinance your first and second mortgages in the future if interest rates drop. your favor
FAQ: What is a subordination clause and how is it related to a HEL?
Depending on the lender, a subordination clause or agreement generally means that before you can get a second mortgage, the mortgage company must agree to allow the second mortgage to be placed in first lien position. The new loan then takes precedence in the event of foreclosure.
This is especially important in the future if you pay off your first mortgage, because the lender in charge of your second mortgage can write a new first mortgage and place it in the first lien position, which will help protect your interest rate, since the rate for second mortgages is higher.
The terms of subordination clauses can vary from lender to lender, so it’s important to talk to your lender before entering into any agreement.
Being an informed consumer is the first step in making sure you get the loan that’s right for you. Be sure to talk to your lender and carefully weigh your options before making a final decision.