Home equity loans are a potential savings option for homeowners who want to consolidate debt and/or convert some of their bad credit to good credit. The potential tax deductions on home equity loans make them potentially useful for debt consolidation, since other consumer and personal loans generally have no tax deductions and higher interest rates. A home equity loan can also be used to improve your home and certain tax advantages may apply.
According to current home equity statistics from the US Census, approximately 7.2 million Americans obtained home equity loans last year. However, not all loans are right for everyone. It’s important to decide what type of home loan is best for you. To make sure you’re making a safe financial decision before you sign 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 thing?
A: No. Although both loans are second mortgages, a HEL and a 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 typically have a fixed interest rate, but according to Bankrate “almost always come with fees and closing costs, which many lenders typically don’t charge for lines of credit.” While home equity lines of credit may be free of some of these expensive up-front fees, keep in mind that they are also variable-rate loans, which means that the interest rate can change over time, depending on the rate. preferential rate established by the Federal Reserve.
When choosing between these types of loans, ask yourself whether getting 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: Loan-to-value is the difference between your current mortgage amount and the recent appraised value of your home. This ratio will be calculated in the loan terms of your second mortgage.
Frequently Asked Questions: Is a home refinance a better option than a 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 an all-cash refinance.
Obtaining an interest-only refinance is also a possibility. However, while interest only reduces your payments, it can also reduce the equity in your home and, says CFA for bankrate, Don Taylor, “only makes sense for people who don’t plan on being in the mortgage or house for a while.” “. 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 is it related to a HEL?
Depending on the lender, a subordination clause or agreement usually means that before you can get a second mortgage, the mortgage company must agree to allow the second mortgage to be placed in the first lien position. The new loan then has priority 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 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 subordination clauses can vary by lender, so it’s important to talk to yours before entering into any agreement.
Being an informed consumer is the first step in making sure you get the loan that’s right for you. Be sure to talk to your lender and carefully weigh your options before making a final decision.