The equity you have in your home is an asset. You can “tap” into it to pay for other things, like a remodeling project or your child’s college tuition. But you need to learn some of the basic concepts before you make such a decision. Home equity loans and HELOC’s (Home Equity Lines Of Credit) can only be utilized if your homes value is greater than the amount that you owe.
Home equity loans usually come in two forms: Second Trust Deed Mortgages or HELOCs. A home equity loan is a loan that a homeowner can take out if their home is worth more than the balance on their mortgage. The difference between the balance that is owed on the mortgage and the fair market value of the house is the ‘equity.’ This is the amount the homeowner would get to keep if he sold his house and paid off the mortgage.
Home equity loans generally have a higher interest rate than First Trust Deed Mortgages because they are considered a higher risk. Home equity loans can be obtained as both fixed rate loans and adjustable loans, with the interest rate on a Second Trust Deed loan usually fixed and a HELOC usually with a variable rate of interest.
Here’s a comparison of the two:
Second Trust Deed Mortgages:
A second mortgage gives you a fixed amount of money that you would repay over a fixed period of time. You might benefit from using a second mortgage instead of a HELOC if you need a specific amount of money (a lump sum). For example, if you need a certain amount for a remodeling project, the second might be a better option.
If home values drop you still have your money whereas with a HELOC the lender may lower the credit limit or cancel it altogether.
Just as the name implies, a HELOC is a home equity line of credit that can be used incrementally and you only pay for what you use. The homeowner receives a credit limit in accordance with the equity in the home, and he can use it as needed. For example, if a homeowner applies for a $100,000 home equity line of credit, he can us $30,000 to put in a new kitchen right away, and then use $40,000 to pay for a year of college five years later. The advantage to the home equity line of credit is that the interest in charged only on the amount of money that is actually accessed.
Similar to a credit card, in the sense that you draw on it periodically and have a credit limit and pay a minimum monthly payment based upon whatever the balance is.
One advantage to this loan is that you usually don’t have to pay points to obtain the loan like you do with a second Trust Deed Mortgage.