Getting a Second Mortgage Loan
Your mailbox is flooded with offers for home equity loans, but what exactly is being offered, and is it a good deal for you? Here’s what you need to know to decide.
Terms to know
A home equity loan, also known as a second mortgage, is a type of loan that allows homeowners to borrow against their home’s equity.
Equity is the value of your home beyond the existing mortgage. This amount increases as the value of property in your area goes up and also as you pay down your mortgage. A property appraisal can help you to determine your home’s current worth, and subsequently the amount of equity that you have.
Putting it all together
When a lender extends an offer for a home equity loan they are offering to loan you some of your home’s equity, with the understanding that you will repay this amount plus interest and added fees. Your home serves as collateral for the loan, and can be seized to repay the debt if you fail to make payment.
A home equity loan is a one-time loan with a fixed interest rate and a set repayment schedule. Typically the repayment period for an equity loan is much shorter than that of the original mortgage on the home. 5 and 10-year terms are common, but repayment schedules vary from lender to lender, and can be shorter or longer than this.
What can a home equity loan be used for?
A home equity loan can be used for any number of things, but is most commonly used for debt repayment, home improvements, education costs and vacation expenses.
The pros and cons
Home equity loans offer homeowners the ability to access large sums of money at lower interest rates than those typically available through credit cards or personal loans and generally offer much longer pay off periods.
On the down side, an equity loan places your home - one of your largest assets - at risk and must be paid in full upon the sale of the property.
Explore the pros and cons fully, and compare the offers of several lenders before deciding if a home equity loan is right for you and your situation.