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July 13, 2016 nkad3

How Do Home Equity Loans Work?

Home equity loans can often times  be confusing for consumers since the term can be used to describe one of many equity ‘products’ offered by the banks or lenders. Regardless, an equity loan does take the form of a mortgage and is secured to the property in question. So how do home equity loans work, and what can they be used for? Here is a quick breakdown.

Home equity loans can be one of 3 products:

  1. A fixed amortized mortgage- Assuming your home is free and clear (no mortgages owing), a new mortgage can be placed on the property (to a maximum allowed by lending institutions). Though this is a regular mortgage, you are using the homes equity to borrow money and therefore it is an equity loan.
  2. A home equity line of credit (HELOC) – This is a revolving mortgage that can be used & repaid with the same flexibility of your typical credit card but with a much lower interest rate. It can be in the form of either a first or second mortgage depending on what charges are currently registered on the property.
  3. A private second mortgage- This is an equity loan as well, but is loaned from private sources. It may not have the same flexibility as a HELOC, but it’s very easy to obtain and a great short term solution for obtaining funds fast. Be prepare to pay a little more, but conveniently you won’t be jumping through the same hoops and hurdles as option #1 and #2.

How do home equity loans work with regard to ‘terms and conditions?’  Mortgage terms and conditions are relatively the same across the board. They do differ slightly in their ways, but you can expect the standard terms and penalties to overlap in each option. One thing that does differ between the 3 options mentioned above would be the payments frequency options and pre-payment privileges (Speak to us for more details about the above 3 options).

How do home equity loans work if you have no equity? Well, home equity loans do require that the loan-to-value of the new equity loan + any other existing mortgages does not exceed a maximum percentage (typically 85%). This means that there must be equity in the home accumulated through paying down the mortgage and natural market appreciation.  If there’s not enough equity, the bank/lenders will see the request as being too risky and won’t move forward. (Speak with us to figure out how much equity is available in your home).

How do home equity loans work in a scenario like yours? Home equity loans can be taken out for many reason, the most common being a debt consolidation. This is when you pull the equity form your home to eliminate higher interest debt accumulating from unsecured sources. This is a strategy taken to fix and rebuild credit, or as a strategy to avoid diminishing your credit score if taken soon enough. However, equity can be pulled for endless reason. Some  of the reasons are, but are not limited to; renovations, investments, raising business capital, paying out car loans, purchasing assets, vacation… and the list goes on.

To better understand home equity loans even further, contact us with a brief summary of your request and we’ll be able to paint a picture of what options are available to you. The steps involved will change depending on the route you take, and that’s why we’re here to help guide the way.