Home Equity Loan-Which One is Right for You?
There are probably 20-30 variations of the home equity loan. The two most popular types of home equity loans are called "open" and "closed." The "open" loan or a line of credit sometimes called a HELOC. In this loan usually the interest rate is variable tied to the prime rate and the term of the loan can range from five to thirty years. Because the rate is variable the payment amount is as well which might be problematic. Lenders often offer a special introductory rate as an added incentive. Usually loan closing costs are waived and the application process is limited to ability to pay, credit score, length of time in the house and a drive by appraisal-so a relatively simple process.
The other type of loan is a "closed" loan where the amount is a fixed amount for a fixed period at a fixed rate with set payments so at the end of the term the loan is paid off much like a regular installment loan.
Both loans are secured by second mortgages on the property. The terms of these loans can range from five to thirty years. They are almost always shorter than a first mortgage loan.
One of the variations which has broad appeal is the 125 home equity loan so designated because the borrowers can get up to 125 % of the current combined loan to value (CLTV). This type of loan is particularly appealing to first time home buyers who may need to spend extra money on furniture, home improvements, landscaping, etc. The extra money can be used for debt consolidation, medical expenses, or college tuition as well.
The rates and term of the loan are usually fixed but because the extra money is unsecured the rates are generally higher than a regular first or second mortgage rate but still lower than credit card rates. This type of home equity loan is good for someone planning on staying in the house for a long time while the home appreciates. If appreciation does not catch up or surpass the amount of the mortgage the home owner will be "upside down" when they sell i.e. they will owe more than the property is worth.
There are additional types of home equity loans as well. Reverse mortgages have gotten a lot of publicity lately and will probably get a lot of press in the future as baby boomers near retirement age.
A reverse mortgage is a home equity loan that you do not repay as long as you live in the home. You must be at least 62 and the house must be debt free or you must be able to pay off the debt other wise you can not qualify.
The reason it is called a reverse mortgage is because it is the opposite of a regular home equity loan where you reduce debt and build up equity. In a reverse mortgage you reduce equity and build up debt. That is where the money comes from.
There is such a wide variety of loans you can get using the equity in your home as collateral that it can be confusing. But if you do a little research you can find one that is just right for you and your needs.
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