Home Equity Loan: Frequently Asked Questions

Home equity loans are a money-saving option for homeowners who want to consolidate their debts and / or turn some of their bad credit into good credit. The potential tax deductions for home equity loans make them potentially useful for debt consolidation, as other personal and consumer loans typically have no tax deductions and have higher interest rates. A home equity loan can also be used for home improvement and certain tax advantages may apply.

Based on current home equity statistics from the U.S. Census, 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 what type of home loan is best for you. To make sure you’re making a safe financial decision before signing on the dotted line, read on for answers to frequently asked questions (FAQs) about home equity loans.

Frequently Asked Questions: Are Home Equity Loans (HEL) and Home Equity Lines of Credit (HELOC) The Same?

A: No. Although both loans are second mortgages, HEL and 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 generally have a fixed interest rate, but based on the bank rate, “there are almost always fees and closing costs that many lenders generally do not 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 are variable rate loans as well, meaning the interest rate can change over time, based on the rate. preferential interest rate established by the Federal Reserve.

When choosing between these types of loans, ask yourself if receiving your loan all at once or having access to a line of credit works best for you.

Frequently Asked Questions: What is a loan-to-value ratio?

A: The loan-to-value ratio is the difference between your current mortgage amount and the recently appraised value of your home. This ratio will be included in the terms of your second mortgage loan.

Frequently Asked Questions: Is Home Refinancing a Better Option Than 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 refinance.

It is also possible to obtain an interest-only refinance. However, while an interest only lowers your payments, it can also lower your home’s equity and, says CFA for bank rate Don Taylor, “only makes sense for people who don’t plan on being on the mortgage or the house. over a period of time. 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 mortgage in the future if interest rates drop. your favor.

Frequently Asked Questions: What is a subordination clause and how does it relate to a HEL?

Depending on the lender, a subordination clause or an agreement generally means that before you can obtain a second mortgage, the first mortgage company must agree to allow the second mortgage to be placed in the position of first lien. The new loan 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 then 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 the subordination clauses can vary by lender, so it is important to have a discussion with yours before entering into any agreement.

Being an informed consumer is the first step in making sure you get the right loan for you. Be sure to speak with your lender and weigh your options carefully before making a final decision.

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