subject: The Home Equity Loan or the Second Mortgage Explained [print this page] The Home Equity Loan or the Second Mortgage Explained
Home equity loans, also called the second mortgages, are loans that allow you to borrow against the value of your property. You are required to make monthly repayments towards it over a period of anywhere between 10 and 15 years.
Borrow against you home equity in the following ways
Home equity loans, traditionally known as second mortgages, have adjustable or fixed mortgage rates and a repayment term set between 15 and 30 years. Interest rates are generally lower than most credit cards but higher than the first mortgage and fixed for the life span of the loan.
The home equity line of credit (HELOC) functions essentially like a credit card with a variable interest rate. You can draw from a credit line (over a pre-determined time period) whenever you require cash.
These loans offer the borrower cash for a broad variety of uses. Homebuyers can also use these funds to meet expenses of home improvements or repairs, consolidate debt, or even finance their children's college education.
Qualification requirements
In order to qualify for second mortgages, homeowners should have enough built-up equity. Home equity is the present market value of your property minus the amount still due to be paid by you on your mortgage. Let us look at a couple of examples to illustrate this point:
For instance, if your property is worth USD 250,000 and the amount owed on your mortgage is USD 200,000, your equity is USD 50,000 or 20 percent.
If, however, your property is worth USD 250,000 and amount owed on your mortgage USD 275,000, your equity is considered negative or zero for all loan intents and purposes. Homeowners with no equity in their properties do not qualify for a home equity loan.
There are many websites that offer home equity calculators to help you calculate your home equity and combined loan-to-value ratio (CLTV). To be considered for a loan in the present economic climate, besides the equity that you have, you will also require a good credit score as well as be able to demonstrate that you earn sufficient income to meet your expenses and debts.
Loan against equity
Home equity loans help you borrow against your property's value. This means that if you fail to make your monthly payments against these loans on time, you could end up losing your home.
A home equity loan can prove to be challenging in case you need to modify your loan or want to refinance. It can also be tricky if you must sell the property for an amount lower than what you owe the lender this scenario is known as a short sale'.
All types of housing loans are more difficult to obtain today as compared to a few years ago in the light of the sub-prime mortgage crisis, which crippled the American housing market. While second mortgages are not impossible to get, qualification norms are now much more stringent with a lot of emphasis on credit history and income verification. If you do meet the criteria, shop around and compare rates and terms to make a financially sound decision.
