Every loan has features that are similar to other types of loans and nuances that make it special. Your home equity loan is no different. Learning about the ways this loan differs from others can help you determine if using your home’s equity is the right way to go or if you should continue looking for other options.
Home Equity Loan Basics
As the name implies, a home equity loan taps into your home’s value by using your home as collateral. Specifically, your equity in your home is the difference between the appraised value and the amount you still owe. While the specific amount of the equity you may borrow against varies based on your state’s equity laws, the basic calculation for determining available equity is the same.
If you live in a state that allows a max loan to value of 90 percent on a home equity loan, you follow the same procedure to figure out the dollar amount as someone in a state allowing only 80 percent. You multiply the maximum percentage by your home’s value and subtract what you owe. This means a house worth $150,000 with a first mortgage balance of $75,000 has available equity of $60,000 if 90 percent is the state maximum.
Home Equity Loan Rates
Home equity loans rates are often lower than the rates offered for other kinds of debt, but remain higher than the original mortgage. Your home is a powerful, secure asset and can command lower rates than you might expect for an unsecured loan or automobile purchase because there is less risk for the lender in the event of non-payment. Because your home equity lender takes second lien position behind the original mortgage holder, the position is less secure. When a borrower is unable to make payments to both lien holders and the home is auctioned off, the first mortgage lender receives payment before your equity lender. In times of declining home values, this is an especially precarious situation for home equity loan lending companies.
Home Equity Loan Terms
The amount of your loan is the main factor when determining the length of time you may take to repay your home equity loan. Lenders offer terms up to 30 years, but 15 years is the more common term. Like your first mortgage, the longer terms provide you lower payments, but can more than double the amount of money you pay in interest. For best results, always accept the lowest term with payments you can still afford and attempt to make additional payments for an early payoff.
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